Goodbye to ad-hoc portfolios
Investment portfolios are often built in an ad-hoc fashion with too little thought given to taking a co-ordinated approach to investing.
Many investors, for instance, have collected "bottom-drawer"shares over the years that don't seem to have much of a useful place in their portfolios. These shares may have been inherited, bought at random from time to time or gained when a membership organisation listed on the market.
One way to go about tidying up a messy collection of investments is to think about what properly-diversified portfolio you would have created if you had started from scratch.
Perhaps put yourself in the position of a person who has rolled over large amount of super into a new self-managed super fund (SMSF).
The money in this SMSF example is in cash and is ready for investment. (For the record, recent tax office statistics show that more than 25,000 SMSFs were set up in 2017-18.)
Vanguard's approach for constructing Australian diversified funds, a research paper* by our investment strategists, gives four key principles that Vanguard uses in constructing and maintaining its professionally-managed diversified portfolios.
These principles – concerning investment goals, portfolio balance, low costs and investor discipline – are as applicable to individual investors as professional investment managers.
Goals
Have clear, appropriate and attainable goals for your portfolio. Critically, these goals should not rely on unrealistic expectations for investment returns or excessive risks.
Most individual investors have a series of goals such as saving enough for retirement, saving for a home deposit and paying off debt before retirement. Once your goals are listed, you can prioritise their importance.
Ask yourself such questions as: How much should I save in total to achieve my goals? How much should I regularly save to eventually reach my goals? How many years do I intend to keep working and saving?
Balance
Set or balance your portfolio's asset allocation to different asset classes appropriately for reaching your goals while staying within your tolerance to risk. (Asset classes include local and international shares, fixed interest, property and cash.)
And then regularly rebalance your portfolio back to its long-term strategic asset allocation to recapture its intended risk-and-return characteristics. (The portfolio of a professionally-managed diversified fund is automatically rebalanced.)
Costs
Minimise costs to improve your chances of better long-term returns. And never overlook that each dollar paid in costs, including investment management fees, is potentially a dollar less in your returns.
Repeated research, including by Vanguard**, concludes that the size of an investment fund's fees is the most-reliable and most-quantifiable predictor of future performance. This applies whether you are investing in index funds, actively-managed funds or a combination of both.
Discipline
Take a disciplined, non-emotional approach to following your investment strategy designed to meet your goals. Don't be thrown off course by overreacting to short-term market movements, the emotions of the investment "herd"and changing investment environments.
And avoid the trap of being an undisciplined performance chaser who switches to whatever is the latest highest-performing fund. Research, including by Vanguard, suggests today's performance winners have a strong chance of becoming tomorrow's losers. And today's losers could become tomorrow's winners.
* Vanguard's approach for constructing Australian diversified funds, published 2017.
**The case for low-cost index-fund investing, Australian edition, Vanguard 2018.
Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
15 April 2019
Latest Newsletters
Hot Issues
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
- Time to start planning for stage 3 tax cuts: technical manager
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015