‘Don’t keep all your eggs in one basket’. It’s a stale analogy but an invaluable lesson.
Let me be more specific…
You shouldn’t keep all your eggs in two or three baskets, either. That way if any one basket fails, you’ll still have plenty of eggs for breakfast, and plenty more to hatch into new chickens, to make more eggs.
It’s what we call the Golden Rule and is the single most important factor in creating and protecting wealth.
In fact, over 90% of investment performance can be attributed to the Golden Rule.
Spreading your money across different types of investments, such as stocks, bonds or property and further spreading them across various industries, sectors, and countries is crucial during economic crises when one or two of your baskets are most likely to fail.
There are two important reasons why you should divide your funds between different types of assets.
First, it reduces the risk to your overall portfolio. By investing your wealth across many types of investments, you are better protected against market fluctuations than if all your money were in one type of investment.
Secondly, it helps you grow your wealth more consistently. Diversity reduces volatility and smooths returns since different types of investments behave in different ways and follow different trends. This means more consistent performance over time and higher returns.
Compare your investment portfolio to the footy. Think of the league as your investment portfolio and each team as a different type of asset. Each with different strengths, weaknesses and chances of success.
Let’s say your team won the premiership last year and you come into the new season feeling pretty confident. Despite losing your number one forward to Sydney in the off-season you’re looking pretty strong in the first few rounds.
But a few months later things have turned for the worse. Your small forward has done his hammy, again. Your captain has done his too. Your top defender tore his pec and is sidelined for ten weeks. And some genius tried to choke his opponent and copped four weeks.
You’d like to believe there’s still hope. But to be 100% invested in your team is taking a risk you can’t recover from.
When it comes to the footy, it’s a matter of the heart — and being 100% invested is quite understandable.
But when it comes to investing, you should never have 100% of your money tied up in just one basket — or even two or three.
But you might be surprised how rarely the Golden Rule is applied to investments.
If you look at the average self-managed super fund, you’ll see that just ten stocks make up half of all Australian share investments. Half!
#1 Commonwealth Bank
#2 Westpac Banking Group
#3 BHP Billiton
#4 Fortescue Metals
#5 ANZ Ltd
#6 Telstra Corp
#7 National Australian Bank
#10 Woodside Petroleum
This is not only lazy investing, it’s extremely risky.
Just because these are popular stocks and even good companies, it doesn’t mean they form a well balanced portfolio when held together.
I mean, how many banks do you see in this list?
If the financial industry takes a hit, how well do you think this type of portfolio will fair?
And since they are already the most popular there are not a whole lot of buyers left. To beat the market you need to buy quality businesses that are out of favour — not those already prized by the mainstream.
And what’s worse is that financial advisors charge you a small fortune only to slot your money into the same stocks as everybody else. They stick to the ‘safe’ option: If they’ve got you in Australia’s most popular stocks, then surely they can’t be liable for poor advice.
But that’s if you’re lucky.
You could have been one of the thousands — actually no one really knows how many…or at least they’re not saying — of customers of Commonwealth Financial Planning, or of other firms providing conflicted advice.
Now I’m not saying that all of these advisors are corrupt, but their remuneration models are certainly not set up with your best interests in mind.
And further still, it’s emerged that many of these ‘advisors’ had little over a fortnight of training in investments. So even if they do have your best interests at heart, many are woefully underqualified to be advising on such important issues.
If your portfolio looks anything like the above, know that you’re risking a huge amount of your money on the success of a handful of banks and miners. You can do better. MUCH better.
But where do you start?
This is one of the problems Bernd and I want to help you solve. And it’s so much easier than you may think.
First, you just need to remember that the Golden Rule applies to your entire portfolio, not just your investments in Australian shares.
Then, you answer these questions to decide how and where you invest:
1. How long will you be investing? This could be the time until you retire. Or you may have other goals in mind, such as buying that boat, travelling the world or making a down payment on a home.
Whatever your goal is, work out the time until you get there.
2. What’s your current level of wealth? This will affect how much you need to amass to have a comfortable retirement or reach your financial goals.
The wealthier you are, the more risks you can afford to take as you can better absorb losses. Or you can take a more conservative stance since you are under less pressure to boost your wealth.
3. How comfortable are you with risk? The amount of risk you can tolerate depends on the two factors above and, of course, your own level of comfort.
You don’t want to lose sleep worrying about your investments, so you need to get this mix right.
The Albert Park Investors Guild will show you how to you find the correct strategy. We will help you decide the best level of each investment type to hold in your portfolio.
And our list of critical investment criteria ensures that only quality investments, in the right proportions, make it into your portfolio.
The most common type of asset allocation model is called Strategic Asset Allocation.
The name sounds fancy, but it’s actually quite a basic method of dividing your money between different types of investments. The allocations are set for the medium to long term and are rarely adjusted. It’s set and forget investing — similar to what the big Super funds do. This is better than having no allocation strategy at all, but you can do better.
The Guild’s portfolios seek out the real opportunities — investments that are out of favour but have great prospects. Picking the right investments within each asset class is what will really make your portfolio shine.
This is called Tactical Asset Allocation.
It allows you to identify the best opportunities across all types of investments. Are there opportunities in European stock markets? How about in corporate bonds, or in international property? These are the kinds of issues I research every day.
If you get this right, you can identify the best opportunities and rebalance the amounts allocated to each asset accordingly. Portfolio rebalancing occurs whenever it’s needed. It involves selling off some of your best-performing investments, while adding to some of your underperforming assets.
This might seem counterintuitive. Why would you sell your best performers? And it can be tough to do in practice. But having a disciplined approach is key to safely building wealth over the long term.
For example, imagine that an equally weighted portfolio of stocks, bonds and property is the best allocation considering your tolerance for risk, as well as your age and your wealth. Now let’s say your 33% investment in property doubles in value. If you don’t rebalance your portfolio, 50% of your portfolio is then betting on the property market rising higher still, and just 25% will be invested in bonds and 25% in stocks. This means you might miss out if stocks and bonds rally, or that you could lose more than you expected if property prices fall.
We‘ve developed a proprietary guide that makes it easy for you to select the best allocation for your specific situation.
We’ll give you clear instructions on how much to invest in each type of asset and what specific investments to buy or sell.
Our network has identified some great stocks. Stocks you won’t find in mainstream asset allocation models. One of these stocks is excellently placed to benefit from Australians’ demand for global investments. It has few competitors and no debt. It also provides a return on shareholders’ equity of over 40%. While the share price has grown 4,000% over the past five years, it remains a terrific opportunity.
Tomorrow I’ll show you the steps we take to identify opportunities such as these.
Investment Director, Albert Park Investors Guild