Asset allocation is always a difficult decision regardless of the economic environment, and an uncertain financial outlook like this one only makes it trickier.
Some say up to $300 billion is sitting in cash that would normally be invested in growth-type assets, which means many of us are keeping our money in this relative safe haven in spite of falling interest rates.
Although many banks refuse to pass on all of the Reserve Bank rate cuts to borrowers, they have no qualms about cutting their deposit rates by the full amount almost immediately after the decision. They just don’t announce it, of course.
Is it time to get out of cash and reconsider your asset allocation? And where do you go?
Jonathan Ramsay, of Van Eyk Research, says: “Just blindly following the compliant regime and the suggested portfolios is not going to get you where you need to be.”
This means you might need to be a bit more proactive than the traditional 70 per cent growth and 30 per cent defensive allocations many suggest for a model balanced portfolio.
Russell Investments’ Graham Harman says investors were greatly disappointed by the equity risk they took on before the financial crisis and the poor performance that resulted.
“The reason is they started with the usual suspects … and the result is people haven’t been achieving their objectives and they haven’t been satisfied.
“If you put 60 or 65 per cent into the sharemarket, about 100 per cent of the risk comes from shares … that means they completely swamp your risk.”
You also don’t want to be taking on too much domestic risk. “I would be looking for opportunities that can add some value other than Australian shares and the first place to look I think would be international shares,” Harman says.
David Stuart, head of dynamic asset allocation at Mercer, agrees that the outlook for international equities is good, particularly in light of potential challenges for the Australian economy.
“We would say don’t give up on equities,” he says.
“Particularly unhedged overseas equities give you some protection if there are economic events that cause [problems] … typically the Australian dollar will weaken and give you some protection.”
And although cash rates are falling, it is still giving a better return than government bonds or other types of straight fixed interest. “We generally say that cash is a fairly good defensive asset at these sorts of levels given how low government bonds are,” Stuart says. “Particularly term deposits offer a fairly decent return for a safe asset.”
The charts in the graphic show van Eyk Research’s suggested asset allocation for conservative, balanced and high-growth portfolios as at end July 2012. The strategic asset allocation should be a long-term goal, and the tactical asset allocation considered on a short-term basis.
The high-growth strategic asset allocation – for those with a very high risk profile – is 40 per cent in Australian and 30 per cent in international equities and the rest split evenly between REIT/infrastructure and alternative assets.
Make sure you understand your risk profile but don’t ignore the lessons of the GFC – equity won’t save us all the time and maybe cash isn’t all that bad. Or, everything in moderation.