FFS TRANSLATE: What’s asset allocation?

Asset allocation is a critical factor in determining the long-term return patterns of your portfolio. Asset allocation also helps you and your financial adviser determine the trade-off between risk and return that suits you.

Asset allocation refers to diversifying your investments into different categories with different risk levels.  An asset can be anything from your home to your right to collect royalties on a book that you wrote1. But when people describe asset allocation, they’re usually talking about money that you invest in the stock market or in your superannuation fund.  This money is invested in three main ways:


1. You buy companies. When you buy a share, you’re buying equity. When you buy BHP Billiton shares, you become a part-owner of the company. You have equity in BHP Billiton.

If you don’t want to buy shares directly, you can buy a fund that holds shares in several different companies. Index funds, for example, are collections of lots of different types of shares, bundled together in one basket.

Different shares have different levels of risk; however, they are generally accepted to be higher risk than fixed-interest or cash.


2. You give loans. When you buy a bond, you’re giving out a loan to whatever group issued (asked for) that bond. If you buy a corporate bond, you’re giving a corporation (company) a loan.  If you buy a government bond, you’re giving the government a loan.  The company or government must pay you interest on that loan. It has a “payment plan” on a fixed timeline. For example, it might pay you interest once a month, or once every three months.

That’s why this is called a “fixed-income” investment: you get income on a fixed schedule.

Government bonds are considered incredibly low risk because the risk of the government not paying you, or going “bankrupt”, is incredibly low.


3. Or you keep it in cash. Self explanatory.

Asset allocation means that you spread your money between a combination of these three categories: equities, fixed-income and cash.  There are several common “combinations” of these categories that you may have heard of:


We will consider several factors when developing an asset allocation that’s appropriate for you, including:

  • Investment goals. We will need to understand your short and long-term objectives – buying a house, private education for your children, impending retirement, or financing a business – to create an asset allocation that helps you reach your goals.
  • Risk tolerance. Do you lose sleep when the markets fall? Or do you shrug off market volatility and wait for it to recover? We will help you to understand your emotional reactions to the risks of investing and can help you create a plan that suits your investment temperament.
  • Timeframe. To tailor your portfolio to your goals, it’s important to define your investment timeframe. A portfolio invested to fund your retirement in 20 years would include a different selection of shares than a portfolio intended to finance retirement tomorrow. For example, a someone who wants to grow their super account might be willing to tolerate short-term price fluctuations in the share market. On the other hand, if you want to retire next year, you might be more likely to choose an allocation that’s more suitable for generating income. We will work closely with you to establish an allocation to meet your needs.
  • Comfort with risk versus return. Risk and return are closely related. The concept of risk/return suggests that low levels of investment risk will result in low returns, while high levels of risk will generate higher returns. Of course, there are no guarantees. While increased risk offers the possibility of higher returns, it also can lead to bigger losses. Balancing the risk you are willing to accept with the investment returns you need or want is something we will discuss with you. The diagram below is a simple illustration of the relationship between risk and return.


Determining the amount of investment risk you can tolerate is essential. We will examine your income, investable assets, investment goals – even your attitude about risk – to determine the risk/return trade-off that’s right for you.

  • Diversification. We will generally build your portfolio using a variety of asset classes to achieve a high level of diversification and long-term stability.


Periodic rebalancing should be considered

Your needs, goals, and investment time frame change over time. So, too, does the market. One of the ways a financial adviser adds value is by monitoring and periodically rebalancing the asset allocation of your portfolio.

Together with us, you can review your investment plan to make sure it stays on track to meet your short- and long-term investment goals.


Asset allocation can influence returns

Holding more shares in a portfolio has historically resulted in higher average annual returns but greater risk. The chart below illustrates how a portfolio made up of 100% shares delivered an average annual return of 10.8% significantly higher than the 7.1% average annual return of a 100% bond portfolio2. The trade-off for that significantly larger return was a much greater exposure to the risk of loss.


Want to know your aset allocation? To book a free consultation with a financial advisert, please book online or contact us on info@fortressfs.com.au

Fortress Financial Solutions founder Chris Black is an award-winning financial planner based in Toowoomba who specialises in superannuation, investing, business succession, cash flow management, retirement planning and personal insurances (including life insurance, income protection, total permanent disability and trauma insurance).

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557.
Final graph taken from Vanguard Plain Talk Guide.

Information on this site may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.

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