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Time to have a look at your asset allocation?

Posted by Scott Keefer on Sep 20th, 2008

This morning I have read what I feel is a very useful piece on Vanguard’s website - Just when you thought it was safe to go back in the water.

The article gives a brief summary of current happennings on the markets and concludes by asking what action, if any, should investors be taking?

It suggets the following courses of action (directly taken from the article):

Do nothing. Sit it out and wait for the upturn. The beauty of this strategy is that you stay invested so when the market recovers you will benefit from any upturn. History shows us that sharemarkets have suffered many setbacks over the years and recovered to higher heights. Check out Vanguard’s updated interactive index chart for a long-term market perspective.

The truth is there is no right or wrong time to invest and being out of the market can cost vital performance. An AMP Capital report found that investors who stay in the market end up better off than those who flee. In fact, an investor with a $100,000 Australian share portfolio who stayed in the market over the last 10 years to 30 May 2008 would have ended up $179,544 better off than one who missed the best 30 days of sharemarket performance (based on the ASX 200 Accumulation Index to 30 May 2008).

If you have reservations about your investment strategy in the current investment climate it can be well worthwhile seeking the advice of a professional financial adviser. An adviser can sit down with you and talk you about your personal circumstances, investment goals and suggest the most appropriate strategy for your needs. This is especially important if you have a high growth strategy and are finding it difficult to sleep at night.

Drip feed your investments. Part of the beauty of compulsory super is that your money isn’t invested all at once. Rather, a set amount is invested at regular intervals. This strategy, called dollar cost averaging, can help to average out market fluctuations over time. This is a strategy the self-employed can take advantage of as well.

Double check your risk profile. You may find that you overestimated your risk tolerance level when markets were more stable. Steve Utkus says investors can overestimate the odds and become overconfident in rising markets. Risk profiling is best conducted under the guidance of a professional financial adviser.

There is no surprise that I fully concur with the thoughts pointed out by Vanguard. I particularly like the last point. Now is the time to be reconsidering your risk profile. Risk profiling is a difficult task. When you are asked the question how would you feel if your investments fell by 10,20,30,40% it is difficult to provide an accurate response if you have never experienced such falls. After 9 months (or more for listed property investors) of really tough conditions the question to be asking yourself is how have you gone handling not only the 25% or more falls on equity markets but also the significant turbulence (volatility)?

If your answer is that you are finding it extremely uncomfortable it may make sense to ease back on your growth asset allocation. Most likely this will have occurred automatically as growth investment values have fallen and defensive assets remained steady but produced income. However a decision will need to made when rebalancing your portfolio whether to set your growth assets back at the original percentage level.

If your portfolio still has too great an exposure to growth assets it may have to be a gradual process to rebalance to a more defensive position as ideally you do not want to be realising losses and then see the market turn back up sharply. One way would be to make sure you don’t reinvest income and dividends as they come into portfolios, rather set these aside in cash and fixed interest security investments and by doing so rebalance your portfolio towards a more defensive setting.

Please get in touch if you wanted to discuss any of these points in more detail.

Regards,
Scott Keefer
www.acleardirection.com.au