Asset Allocation by Martin Hawes

Martin HawesMartin Hawes
Chair, Summer Investment Committee


If I were to look at two investment portfolios, they would probably each have different performances.  The chances are one would show better returns than the other and one would be more volatile (i.e. more ups and downs).

If I then tried to explain this different performance, both the returns and the volatility, the chances are that most of the difference between the two portfolios would be explained by asset allocation, that is, the mix of investments.

The term “asset allocation” is just a bit of jargon for the way that an investor mixes up investments – the percentage in each asset class of shares, property, fixed interest and cash. The proportion that you have in each will determine the volatility you have and likely control how well or how badly you do.

Most people would know that a portfolio with a lot of shares and property trusts would likely have good returns – and that it would be risky. On the other hand, a portfolio that was mostly made up of fixed interest investments and bank deposits would likely give lower returns but that it would be less volatile - the money would be there when they needed it.

The thing that makes investment interesting is that we are all different and that we need to set our asset allocation according to our own situations. Things like the length of time we are investing for, our goals, our financial and life situation and whether or not we are nervy types who could get panicked into selling are some of the factors that can dictate how we should invest.

For example, someone who was 30 years old, had secure income from a good job and owned her house could afford to have quite an aggressive KiwiSaver – perhaps as much as 90% in shares and 10% in property. This investor would probably get very good returns but the portfolio would be very volatile. The volatility ought not worry this investor because she is unlikely to draw on her KiwiSaver for 35 years but she would have quite a ride on the roller coaster.

Conversely, another 30-year-old who was using his KiwiSaver to save for a house deposit should not allocate assets so that he had a lot in shares. To do so could mean that markets could be down at just the time that he would want to draw the house deposit from his KiwiSaver. This investor should have most of his KiwiSaver in bonds and cash (so that his money is there when he needs to buy a house) with, perhaps, a good allocation to listed property (because if house prices rise so too should listed property).

Another example could be a couple in their sixties who are planning to retire in three years and who expect to take big overseas trip to celebrate finishing work. If these people were using their KiwiSaver accounts to save for their trip, they should have a high proportion of their investments allocated to international shares.

This is because the biggest risk for the couple’s trip is that there is a major fall in the New Zealand dollar – such a fall would make the trip very expensive, perhaps prohibitively so. If they allocate a high amount to international shares they would no longer be exposed to a fall in the New Zealand dollar – by investing overseas they have effectively already bought their foreign currency and can be secure in the knowledge that they can take their retirement trip.

An important feature of the Summer KiwiSaver scheme is that you can set your own asset allocation – and change it any time you wish without cost. You can if you want have a lot of shares or allocate very little to shares; you can load up on property or have none at all; you can have the amount of fixed interest or cash as you wish.

This allows you to have a bespoke portfolio that is suitable for you and your situation. It may be that you have a particular view of what share markets are going to do or it may be that you especially like property so want to have a lot of Listed Property – the choice is yours. This means that you can manage risk or go for higher returns depending on what suits you and your lifestyle.

 

You might like to discuss the views in this article with your Authorised Financial Adviser. Please call your Adviser directly or toll free on 0800 11 55 66. 

Read more about My Plan and the Summer Investment Selection.

If you would like to change your investment choice or asset allocation, it's easy to switch online.

Like to learn more about investment mix? Watch Martin's video on asset allocation.

If you are interested in other investor education insights from Martin visit the Media Investor Education page.

Martin Hawes is an Authorised Financial Adviser. This is not a recommendation to buy or sell any financial product and does not take your personal circumstances into account. All opinions reflect our judgement on the date of communication and may change without notice. Past performance is not a reliable guide to future performance. We recommend you take financial advice before making investment decisions. We have prepared this web page in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this web page is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this web page.