The Art of Asset Allocation: A Step-by-Step Guide to Building Your Portfolio

Bryce: [00:02:22] Welcome to Get Started Investing feed in this podcast, we cover all the basics you need to start your investing journey, but if you are joining us for the very first time or at the start of your journey, we do strongly recommend that you go back to the start of this feed and give it a crack from the beginning as it's all in a nice sequential order to get you going and understanding the fundamentals of the markets. If you're feeling brave, though, and just want to dive in, we won't let that stop you. Here at Get Started Investing feed. We unpack all the jargon and the confusing bits here, your investing stories with the goal of making investing less intimidating. And along the way, we'll have a very, very fun time. My name is Bryce and as always, I'm joined by my Equity Mate Ren. How are you going? [00:03:01][38.6]

Alec: [00:03:01] I'm good Bryce. I'm having a very, very fun time with you as well. I said it. You did say it. So we're up to the end of our chapter on assets. Yes. And we've spoken about the different kinds of assets that you can invest in. We've spoken about, I guess, the different characteristics of those assets, some growth, some pay income, somewhat defensive, some are cyclical. And now we're going to put it all together in this episode and talk about how you build a portfolio of different assets. [00:03:31][29.7]

Bryce: [00:03:31] Yeah, let's rock and roll. [00:03:33][1.4]

Alec: [00:03:33] Let's do it so we don't want to start with the negatives, but let's start a little bit negative and talk about the risks. Because when you're thinking about building a portfolio, well, at least for me, what I'm thinking about building my portfolio, I do like to think about, I guess, the risks that I need to be aware of, because that sort of informs some of the decisions that I make. Yeah, we've labelled an asset class correlation here. Let's break down the jargon. What do we mean when we talk about asset price or asset class correlation? [00:04:04][31.0]

Bryce: [00:04:05] A lot of jargon in that. Yeah. So asset class correlation in English just means thinking about the relationships between assets and whether or not they're going to move together or move separately. So the risk really is that if all of your assets in a portfolio, for example, are following the Australian market, if the Aussie market tanks, then your entire portfolio is likely to take a hit. Yeah. [00:04:32][27.3]

Alec: [00:04:33] So you could you could build a portfolio that you think is diversified and you own a whole bunch of different stuff. You could have Australian stocks, you could have Australian bonds, you could have Australian property, you might own your own house and you could have Australian Dollars in an Australian bank. And then Schoeman decides that he's going to declare war on America and all of a sudden the Australian economy tanks, Australian housing prices tank, Australian companies go bankrupt, Australian stock market falls, Australian dollar gets worthless. And you felt like you were diversified and then everything went bad. [00:05:10][37.7]

Bryce: [00:05:11] Yes. So that is an example of being too, I guess, concentrated in in I mean, that's an extreme example. [00:05:18][7.1]

Alec: [00:05:18] It's it's an extreme example. But it's an example that I think is very relevant for Australians. Obviously, it'd be weird if Americans had that, but. Yeah, but I think especially like we grew up, we are now living in an era where it's really easy to invest overseas. It's as easy to invest overseas as it is in your home country. But ten years ago wasn't the case like I think that example was not declaring war on America, but having all of your investments in one country. [00:05:46][27.7]

Bryce: [00:05:47] Yeah, you could make the argument, though, that asset correlation, if you're thinking about the stock market versus directly buying a house like the prices of the stock market, don't move in conjunction with prices of housing, for example. So you could diversify. And in that sense, that if the market tanks, it's not necessarily going to lead to your housing market tanking as well. [00:06:09][22.1]

Alec: [00:06:09] Well, this this leads to the I guess the point of this correlation and the way that I think about it personally is in terms of risk and like the sources of risk. So you're right. Like the example that I used is that Australia goes to war and everything goes poorly. And then the risk is that like anything in Australia becomes a problem. But you're right, there's plenty of things where things that could happen where one Australian asset goes poorly but another asset goes poorly, like if the global stock market takes a fall, you're right, the Australian stock market might hurt. Stock markets around the world might fall, but the Australian property market might be okay. And so then that's a different source of risk. And you don't want all of your investments to be in stock markets around the world to protect against that sort of risk. And so that's how I guess I think about correlation. Um, I think about what are the sources of risk. And if something if one of these things happen, is everything going to go poorly or is something going to do well in that situation? [00:07:11][61.2]

Bryce: [00:07:11] Yeah, so a lot of jargon there. But I think more broadly, what we're trying to get across is that you need to think about how closely related the. Different assets are in your portfolio, and if they are too closely related and they're likely to be impacted by the same sorts of catalysts that will change their price, then you need to consider how you can diversify and get access to assets in other areas that might protect you or might perform better when the others turn. [00:07:42][31.0]

Alec: [00:07:43] And if you don't want to think about it, really, the answer is different types of assets. So equities, property, bonds, that kind of stuff, different types of assets and then in different countries. Yeah, that's really the answer. [00:07:57][14.0]

Bryce: [00:07:58] That is the answer. So the question is, how do you build a portfolio? Yeah. With this in mind. [00:08:03][5.5]

Alec: [00:08:04] So this is this is the I guess the art and the science of investing is actually deciding what to invest in and then but making putting it all together into a portfolio that aligns with what you want to get out of your investments. And, you know, in the last the last episode, we played that game about, you know, if I'm a young person, if I'm an old person, if I'm nearing retirement, if I don't know what I'm doing, all that stuff implicit in all of those in that game, in each of those characters was like a motivation. You know, the young person's motivation was to grow their wealth as much as possible. The older person's motivation was to have income for retirement. And so, first of all, you got to know what you want to get out of the stock market because or out of your investing in general, because then that affects what you buy and how much of it you buy. And so we've got some examples just using stocks and bonds to sort of illustrate that. So let's say I was in someone who just wanted to get paid every year from my investments and I wasn't so worried about growth, but what I really wanted was income. Well, then you would orientate your whole portfolio around things that paid you income. So like bonds, which every year or every quarter will pay you money. So Vanguard have put together this list. This is all US data, but I think it illustrates. So they've basically gone through the spectrum of defensive income portfolios all the way through to the higher growth portfolios. So if I was like, I only want to get paid, I don't care about growth. And I went 100 percent in bonds because I know they pay me income. The average return, all of these average returns of between nineteen twenty six and twenty twenty, the average return would be six point one percent a year. Not bad money in the bank every year for the of those ninety five years you would have lost money 19 of those years. Wow. So over the long term that's pretty good. If you get a little bit more aggressive and you go 80 percent bonds, 20 percent stocks, your average return goes up to seven point two percent a year. And New Year's with a loss is six out of 95. So, again, still very defensive. So, you know, if you if you want to be super defensive, if you want to pay and get paid, if you don't want to lose money, you think like what are the defensive assets? What are the assets that that I won't lose money on bonds become a really big part of your portfolio. Let's say you're a little bit open to a little bit more risk and you're like, oh, I, I'm, I can take some risk. I want to see some growth. Then you start going from that defensive income setting to like a more balanced setting. Let's say you want 50, 50, 50 percent bonds, 50 percent stocks. The average you make a year goes up to eight point seven percent. So a couple of percentage points better every year. Not bad. You take that, but your year with a loss also increases. So then 20 of the 95 years you lost money. So, again, like you take it. Seventy five years you made money and your average is high up, but it's a little bit riskier. And those 20 years where you lost money were socked. [00:11:27][202.9]

Alec: [00:13:21] Or if you want to go to the other end of the spectrum and you want to go super aggressive, I guess let's say you want 100 percent stocks, you're young, you want to grow your wealth, 100 percent stocks. Forget bonds. I can get paid an income when I'm close to retirement. Yeah, average annual return goes to ten point three percent. So now you're in the double digits per year, which is what you start with. That year year with a loss also increases. Twenty five of the ninety five years you lost money and the worst year you lost 43 percent of your money. [00:13:56][35.5]

Speaker 3: [00:13:57] Wow. Yeah. [00:13:58][0.6]

Alec: [00:13:59] So I guess that with stocks and bonds, just for simplicity's sake, illustrates how if you if you don't have a big risk tolerance, if you want to get paid in income, you buy assets that are that way orientated. They have those characteristics. But if you if you want to get growth and you're not so worried about your income and you can lose a little bit more money because you've got time on your side, then you orientate more towards growth, which another example was stocks [00:14:28][29.6]

Bryce: [00:14:29] makes a lot of sense. We should include the link to this, which is the vanguard breakdown in our show notes. So we will make a note for ourselves to do that. And you can have a read through because it's a pretty clear idea of the difference between, as you said, Ren building a a defensive portfolio versus what it could look like building a growth portfolio and how you might want to think about that depending on where you are at in your investing journey. [00:14:58][29.0]

Alec: [00:14:59] Um, so that that was really just using stocks and bonds. There are other assets out there. [00:15:05][6.5]

Bryce: [00:15:06] There are other [00:15:06][0.4]

Alec: [00:15:06] assets. So what if I want to invest in more than just stocks and bonds? [00:15:11][4.0]

Bryce: [00:15:11] Well, the good news is it can all be done through the share market. And it really, again, just comes down to what are the goals that you're trying to achieve. So, for example, if you. Look at some of the ETFs that are out there. There's a beta shares ETF, ETF called a DB if it's an ethical, diversified, balanced ETF and it has a you can head to their website, have a look at some ideas on how they break down their assets. But, you know, they're giving exposure to a lot of, I guess, stocks and sectors within that. But then they also have exposure, a six percent exposure to real estate. I'm sure they've got a bit of cash in there as well as, you know, heavy exposure towards various sectors within the stock market. But it just gives it gives you an idea of how you can use the stock market to get access to different assets and. You know, to have you go on something like real estate or bonds, the more defensive it might become. So it's really becomes a personal thing at this at this point in time. [00:16:20][69.0]

Alec: [00:16:21] Yeah. So I think there's there's like all in one portfolios that you can buy. So like that example you gave or, you know, Vanguard have the like diversified high growth index. There's a bunch of others where they do the work for you and they buy a little bit of real estate, a little bit of bonds, little bit of, you know what a lot generally of stock market, um, have a bit of cash. And all you need to do is buy one thing and it's like a ready made portfolio and you find the portfolio that fits your risk appetite. If you want a really defensive one, they're really defensive ones that will pay income or if you want a more aggressive growth one, they'll have that. So there's like the all in one readymade portfolio for you just to buy off the shelf. And BlackRock, Vanguard, State Street, better shares Fennec that will have an ETF securities. So you can look that way then the other way if you want to do it through the stock market yourself is you can say, all right, well, there's a gold ETF that I can buy and I might make that five percent of my portfolio because I want to, you know, protect against inflation or there's property rates, which are real estate investment trusts, which I can buy on the share market. And that will give me some exposure to property. And property is in the sort of the middle of the growth and the income spectrum where it price growth in Australia. It's price grows unbelievably, but it also can pay an income. And it's a little bit more defensive because it's not going to fall as much, at least historically. So that I might say, well, 10 percent of my portfolio, I want to buy rates. So there's you can either buy like a ready made off the shelf for pre prepared JASE'S preprepared. I'm not going to try that again portfolio. Or you can do it yourself, but you can do it yourself all through the share market. Yeah, either one. The question is, what's the allocation based on what I want to get out of this and how much risk I'm willing to take. [00:18:27][126.0]

Bryce: [00:18:27] Yeah, and no one can give you a right answer. I think that's the main thing that I get. [00:18:30][3.0]

Alec: [00:18:30] Except a financial adviser, I guess. [00:18:32][1.4]

Bryce: [00:18:32] Yeah. So don't get freaked out by thinking that you need to do all of this. You might just want to go all stocks and stocks only. And that's fine. And you can you figure out what is right for you over a long period of time. [00:18:42][10.3]

Alec: [00:18:43] So it's a it's a it's ultimately unfulfilling end to the series for us to say no one can give you a right answer. And we recognise that. But it is just the fact of the matter that it's personal. [00:18:53][10.6]

Bryce: [00:18:54] Yeah, very personal. [00:18:54][0.6]

Alec: [00:18:55] So speaking of personal, let's take an break and then talk about your asset allocation show. All right, so let's you know, we can't we can't say one size fits all, but we can talk about our personal experiences. How do you think about building a portfolio of different assets? [00:19:14][19.3]

Bryce: [00:19:15] I've got a long period of time ahead of me to build a portfolio. So for me, there's really no point going to defensive at this stage in my investing journey. So I'm very much trying to build a growth portfolio. I'm not interested in getting an income from it right now. So I'm not investing in in assets that are geared towards generating income. So therefore I am primarily stocks. I do have small exposure through the stock market to some real estate investment trusts. I do have some more exposure to infrastructure and commodities and I do have some small exposure to cryptocurrency, but broadly speaking, well over 95 percent of my portfolio, maybe not now with cryptocurrency, but a broad part of my a large part of my portfolio is in stocks that I believe are going to give me great capital growth or increase in the money that I put in in value over a long period of time. [00:20:19][64.2]

Alec: [00:20:20] And in terms of cryptocurrency, how do you think about that? Do you think about that is like a defensive play? Do you think about that as an income play? Do you think about that as a growth play? [00:20:27][7.1]

Bryce: [00:20:28] I think about that as a you could lose this all play and buy everywhere. If it gets too overweight, I'm out redirected into stocks. [00:20:37][9.8]

Alec: [00:20:39] But it's a growth play. Absolutely. Yeah, yeah, yeah. [00:20:42][2.6]

Bryce: [00:20:42] It's a speculative growth play. [00:20:44][1.5]

Alec: [00:20:44] It's like top of the risk of most risky but potentially most lucrative. But likely it could go to zero. There's a high percentage chance it may go to zero. But I want to get rich quick and buy that land. [00:20:58][13.5]

Bryce: [00:20:58] But you could say that. Yes. What about [00:21:01][2.9]

Alec: [00:21:01] yours? So I looked at it, uh, portfolio review recently. So I've got some numbers here, so. Same as you aggressive growth for me, like I am earning a salary, I can keep the lights on. For me, investing is not about paying myself an income to to live. It's about setting myself my future self up. So I am growth and I'm aggressive growth. I've got three percent in cash. I've got, uh, five percent in fixed income, and I've got three percent in precious metal. Everything else is stocks and a little bit in crypto. Jay. [00:21:44][43.0]

Bryce: [00:21:45] Yeah, I think I'm about, uh, 30 percent cash at the moment. [00:21:48][3.6]

Alec: [00:21:49] Well, yeah. Bearish, probably smart. [00:21:51][2.0]

Bryce: [00:21:51] No, I don't know. It's I'm actually I'm just thinking about what to do with it, to be honest. But that's interesting. Yeah. You know, aggressive. Aggressive. I like it. I love to say it. [00:22:00][9.0]

Alec: [00:22:01] So we just spoke about our personal portfolio is one thing neither of us touched on. There was super. How do you think about super in terms of your portfolio? [00:22:09][8.5]

Bryce: [00:22:11] I think about super in the same way that I think about my personal investing portfolio, which is I want it dialled up to the most aggressive growth mix of assets that you can get. And I think my portfolio reflects that at the moment through Hoy's. Plus, you can go in and fiddle around with a few things and I've done that and it's it's as aggressive as I can get it. I would like to take a bit more control of it, and I think there's a few products coming to market soon that will allow us to do that. But for me, I'm not trying to protect that capital. I'm fortunate enough that we're at an age where we've got a decent amount in there. Now that, you know, if you let it compound over a long period of time, it's going to be a meaningful amount. Yeah. When I'm sixty seventy five years old and when I get to that stage, I'll start thinking about how to protect it because I'm going to need to live off it, hopefully. And for now though, it's it's max growth. Yeah. But you can't overlook super. I think you need to pay attention to it and you need to think about it depending on where you are within your investing journey. But don't forget that you've got super it's in your power to to do something about it. And it's a pretty powerful tool. [00:23:23][71.7]

Alec: [00:23:23] Yeah. For me it's just about thinking about super as part of your portfolio. Like if you're if you're saying I want to be super high growth in my personal investing and then your super is set to the most defensive setting, maybe there's a reason for that. Maybe you like, because there's a lot of risk in what I'm doing. I want to be defensive in my super. If you've thought about it and that's your choice, that's fine. But to just not think about it is silly. I don't like vice versa. You know, my folks nearing retirement, they're being quite conservative if they're super set to super high growth, because I just haven't looked at it for twenty years and that's what they put it out twenty years ago. That's dumb. Yeah. So you just got to think about it as part of your portfolio. You got to make the decision about how it's invested. If you want to take more control, that's great. But everyone should at least take the minimum control of looking at how much fees they're paying and what setting it's set out in terms of aggressive, defensive or balanced. [00:24:22][58.7]

Bryce: [00:24:22] Absolutely. Well, that is a nice way to finish our asset class. I mean, we've done three episodes touching on assets, asset classes, some of the key characteristics, how you can invest in them through the share market, how you think about building a portfolio and closing out with a little bit of a high level view on what we're investing in. So plenty to plenty to consider and mull over again. If you have just started get started investing at this point, we would highly recommend you go back and listen to the first episode and continue on through there as we've built this podcast in a way that everything builds on one another. So make sure you go back and listen from the start, guaranteed you'll start feeling more confident about where you're on your investing journey. But Ren always good to chat. We'll talk about next week. [00:25:09][46.7]

Alec: [00:25:09] Sounds good. [00:25:10][0.3]

Speaker 4: [00:25:10] Get Started Investing feed is a product of Equity Mates media. All information in this podcast is for education and entertainment purposes only. It is not intended as a substitute for professional finance, legal or tax advice. The hosts of Get Started Investing feed are not financial professionals and are not aware of your personal financial circumstances. Before making any financial decisions, you should read the product disclosure statement and if necessary, consult a licenced financial professional. Do not take financial advice from a podcast. For more information, head to the disclaimer page on Equity Mates website where you can find the ASIC resources and find a registered financial professional near you. In the spirit of reconciliation, Equity Mates media and the host of Get Started Investing feed acknowledge the traditional custodians of country throughout Australia and their connexions to land, sea and community. We pay our respects to their elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander people. [00:25:10][0.0]

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