Asset allocation key to creating a smart long term investment strategy

November 2017

How to Build a Long Term Investment Portfolio

By Danica Hampton

Asset allocation is the foundation of your wealth management strategy. Over the long term it will be far more important to your overall investment returns than any decision on a single investment. A well designed asset allocation can also help protect your assets during cyclical volatility.

Asset allocation defines not only the asset classes you want in your portfolio, but proportion of growth and income assets to match your risk appetite.

Getting asset allocation right requires lots of discussion and drilling down into what type of investor you are, what suits your family situation, long term goals and the level of risk you can tolerate.

Source: Citi Private Bank Global Investment Committee as at 24 August 2017

For instance, if you are a couple you may find your risk tolerance differs substantially when it comes to certain assets like a negatively-geared property or managed fund. A conversation about these assets may clarify or alleviate some risk concerns, but it also may raise fundamental differences in risk perceptions that will need to be taken into account when constructing an investment portfolio.

Source: Citi Private Bank Global Investment Committee as at 24 August 2017

What types of assets could be considered in a portfolio? On the growth side, assets include local and domestic equities, commodities and property. On the income side of the ledger, fixed interest, cash and infrastructure are usually contemplated.

Source: Citi Private Bank Global Investment Committee as at 24 August 2017

Geographic diversification should also be considered. Each country has different economic, political and financial circumstances, which can create opportunities and risks. Careful selection of offshore exposure, whether through corporate bonds, equities, foreign exchange or other investment instruments, can help reduce the volatility of your investment returns and capture growth opportunities.

Offshore markets also help broaden your investment choices. There are many Industries like technology, pharmaceuticals and agriculture or global luxury brands that are not easy to invest in locally. Your asset allocation needs to be reviewed periodically. Over time your portfolio will drift from your initial asset allocation targets as certain assets perform better than others. Rebalancing your portfolio, by selling off the performance, taking the cash and buying new assets is how your build your portfolio strength and returns over time.

While it may seem logical to keep a performing asset, and perhaps even buy more of it, different assets will have different performance characteristics over time. Taking profit and building your asset base will give you long term performance.

Your asset allocation may also need to be adjusted over time to suit different stages in your life. As a general rule, as you get older, your portfolio will become more risk averse to protect the wealth that compound interest and smart investing generates.

Going through the asset allocation process means your portfolio will also take into account any personal preferences, like ethical investing or investing in thematic streams like mobile technology, social media or electrical storage.

And there are pitfalls to avoid, particularly when it comes to risk.

For Australians that often relates to property, as the family home and an investment property or two can account for sizeable portions of a total asset portfolio.

Alternatively, a manufacturer of cars parts may invest heavily in the auto industry, as it is an industry they understand well. While wealth may build strongly during good times, any shift that causes long term decline can also erode wealth swiftly.

And any worker that get bonuses in the form of company shares could over the long term end up with a significantly skewed weighting to that industry.

"Hot" assets can also be problematic, like jumping into lithium mining or a new social media float because you read about it in the financial press or from other investors.

A well-constructed portfolio initiated by asset allocation will help avoid mistakes or rash decisions, and will always aim towards long term goals rather than short term hunches.

At Citi our experts will just give objective advice, based on our analysis, and without any emotional attachments that can hamper correct decision making. However, at the end of the day you are the driver of your portfolio, and you must feel comfortable both with the choice of assets, and the risk profile those assets carry.

Danica is an Investment Specialist at Citi Australia

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  • Important Information:

    This document is distributed in Australia by Citigroup Pty Limited ABN 88 004 325 080, AFSL No. 238098, Australian credit licence 238098. Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. Before acting on this advice you should consider if it's appropriate for your particular circumstances. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product, and consider if it’s suitable for your objectives, financial situation, or needs. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance. Investment products are not available to US people and may not be available in all jurisdictions.