After launching just over a week ago, the Albert Park Investors Guild has generated a lot of questions from members.
Of course I don’t know anything else about their personal situations, and I can’t provide specific advice, but I’ve offered general ideas as to how membership to the Guild can help them reach their financial goals.
Alex has a small amount to invest initially and wants to know what asset allocation strategy he should take.
‘I subscribe to Albert Park Investors Guild, and one of the reports mention something about asset allocation. Unfortunately for someone like myself, I only have $1500/month to invest in shares/bonds etc. I also have a mortgage which takes up a significant part of my income from the paycheck. What would be the best strategy for asset allocation in this case? I have about $5500 in an index fund (Australian shares) and $2000 in 2 ASX stocks.
For anyone with a small initial investment, I would recommend the following.
Firstly, don’t forget to keep a decent amount of ‘liquid’ assets on hand for emergencies. Put aside enough cash to pay your mortgage and other living expenses in case you lose your job or face an emergency. Generally, I recommend that at least three months of expenses should be set aside.
Keep this in an account with low or no fees that pays a competitive rate of interest. This could be cash in a high interest bank account, or even a term deposit — but keep in mind the high interest rate will be forfeited if you access the money early. A cash ETF, as described in the Albert Park Investors Guild, is another option.
Outside of your home, your investments are already highly concentrated in the Australian stock market. The shares in the two Australian companies can be kept, if you still believe they are quality investments — check the Guild’s Manifesto special report, which can help you decide. Some things to consider are whether the company has a dominant position in its industry, a strong track record, a bright outlook and a sustainable business.
As for the investment in the Australian index fund, check that you are not paying higher fees than are available elsewhere. Traditional managed funds often have higher fees than do listed products, such as Exchange Traded Funds and Listed Investment Companies.
Prior to more wealth being accumulated and while the portfolio is concentrated in just a few investments, it would be wise to invest in other assets, rather than adding more Australian share investments.
To get diversification with just limited funds and without having to spend too much on brokerage, I suggest investing in listed funds. Small amounts, such as $1,500 each month can be invested in diversified ETFs or LICs with exposure to other markets.
For investors who already have a large proportion of their investments in the Australian market, ETFs with international exposures would be a better option.
There are currently three of these recommended in the Guild’s Wealth Havens portfolio. One that offers a diversified investment in the US market, one in global property trusts, and one that has exposure to companies operating in emerging market economies.
In time, additional funds will be recommended to provide further diversification. These could be ETFs that invest in diversified metals, government and corporate bonds, agricultural commodities, or in a more concentrated sector of local or international markets. Each will require just a small initial investment amount.
And remember to apply trailing stop losses to your investments to lock in your gains and limit your losses.
Bill asks what his best short term strategy is and how he should begin to invest in the Guild’s recommendations.
‘I have a problem. Firstly thank you and the Chairman for this opportunity. I have currently $1500 invested in 3 Australian stocks. Should I sell or wait on these stocks? I am a late investor (66) paying off credit cards and mortgage debt. I like your plan but should I just add to the plan as I can afford or is there a better way and more affective in short term?
It’s generally best to pay off your credit cards. You could be paying as much as 20% p.a. interest on them. So unless you had an investment that had a GUARANTEED return of more than this amount of interest, it is best to pay them off as soon as possible. As long as mortgage repayments are being met, then there is generally no need to pay more towards that.
Once you’re ready to invest in the Guild’s recommendations, the Wealth Havens portfolio is a good place to start. The portfolio contains diversified listed investments, meaning that you can invest in a basket of different companies, or investments, through a single listed product that trades like a regular share. This means you don’t face the risk that one company you bought stock in crashes. Your risk is spread out.
It also helps keep transaction costs down. Be mindful of transaction costs if you are investing small amounts at a time. Consider that to buy and then, at some point, sell a position will cost you an average of around $40 in brokerage fees. This $40 is over 2.5% if you are investing just $1500 in a single ASX-listed stock. This drops to less than 1.5% if you invest $3000 in a single position. Putting a larger amount into one of the Exchange Traded Funds that the Guild recommends provides the safety that comes with diversification, through easy to transact individual investments.
If you are comfortable with the stocks you are currently holding, you can keep them. As I mentioned to Alex, above, the Guild’s Manifesto document explains how we select individual stocks. You can apply the same thinking to the stocks you already own.
Colin asks how property fits into his asset allocation strategy.
‘I am just trying to determine my portfolio percentages and I have a problem with real estate. You say to include my home (which I own) but it is much more than the 10% total of my portfolio. I am not stupid enough to sell it just to fit the recommendations but should I still buy the property ETF or give it a miss.
Of course you shouldn’t sell your home — it’s security and a place to live. And it’s OK to ignore your home as an investment when determining your asset allocations.
However, buyers would be wise to consider their allocation to property prior to buying a home. I know how expensive housing is in Australia, but ideally after your mortgage payments you should be left with enough funds to invest in different types of assets. If you don’t, your wealth will be heavily tied up in, and dependent on, the local residential property market.
Or if you own, or are thinking about buying an investment property, be aware that you would be very reliant on the strength of the residential property market and face the risks that come with that. This is assuming that your properties make up more than 10% of your net worth.
You can allocate a small proportion of your investments to international property markets, which offers you a different investment opportunity than owning a single residential property.
The property ETF recommended in the Guild provides an investment in hundreds of listed property companies and REITs. Each of these companies invest in commercial, retail, residential and industrial properties throughout the world. Being so diversified across listed companies, property types and countries gives you a vastly different investment exposure than what you’ll get from local residential property.
But you might want to ignore advice to buy other investments that offer further allocation to Australian property, and Australian residential property in particular.
Investment Director, Albert Park Investors Guild
Guild members are welcome to send in any clarifying questions — please email email@example.com. If you are not a subscriber to the Albert Park Investors Guild, you are welcome to sign up for membership subscription, which provides our member reports and latest communiqué. Membership is fully refundable within the first 30 days.