My Portfolio Rules!

With the blockbuster hit series ‘My Kitchen Rules’ dominating TV ratings, consider the similarities between developing a successful portfolio and creating a successful restaurant quality dish.

Investing is like cooking; great chefs demand the best ingredients, know which ingredients produce which results, mix ingredients in the right amounts and continually taste and adjust.  Creating a successful portfolio is no different.

Master your Ingredients

There are four basic investing ingredients in successful portfolios.

1. Cash and term deposits are the safest defensive assets.  Cash provides liquidity, while a series of rolling term deposits protects you with a reasonable yield.
2. Bonds can be a relatively safe investment providing an adequate yield, but if interest rates rise, your bonds will likely fall in value.
3. Shares are a commonly preferred growth asset class, bought on the ASX or indirectly via low cost ETFs or more expensive managed funds.
4. Property as an asset class includes investment properties and indirect commercial property e.g. Australian Real Estate Investment Trusts (A-REITs).

Know thyself

• Are you risk averse or risk tolerant?
• How long do you have before your assets need to be turned into cash?
• How close are you to retirement?
• How do you believe markets will perform medium to long term?

This will help determine how much risk you should take.  Some are risk takers, others are risk adverse.

If you worry about short term volatility and take no risks, you may outlive your funds (‘longevity risk’). If you’re outlook is negative, build in insurance by holding more in cash and defensive assets.

Follow the right recipe

A ‘Balanced’ portfolio splits 50/50 between defensive and growth assets – e.g. defensive investments of 5% cash for liquidity, 35% rolling term deposits for security and income and 10% in bonds for some relatively low risk corporate and government exposure.

On the growth side, you could allocate 30% Australian equities, 10% property and 10% international.  You could add spice to your Australian equities by considering blue chips, tax effective high dividend yielding stocks or even some small cap exposure.

Just as good chefs adjust their recipes for the season and customer tastes; review your portfolio given prevailing economic conditions, and your own financial circumstances.

Guidance can help

For some investors, just like cooks, the assistance of a seasoned hand like Pete and Manu can lift performance from adequate to excellent. So too, if you employ a trusted, experienced and qualified advisor.

The pièce de résistance

You can’t simply pile all the best ingredients into the mixing pot. Experienced chefs devise their menu (risk profile) and carefully select the best ingredients (investments) for the perfect meal (portfolio).

Successful chefs continually taste and season, adapt and improve.  When investing, review your asset allocation over time to ensure your hard earned wealth works optimally for you.

Tim Mackay CFP^®

Quantum Financial Services