New year, new investing habits

The new year is a great time to get into financial shape. Here’s some simple steps to develop new investing habits.

The new year often comes with resolutions to get healthier and fitter.

On the financial front, it’s also a great time to review investments and superannuation portfolios and assess one’s financial wellness. Investors should take time to reflect on the habits that were beneficial and those that might need to change, and only make necessary adjustments to their portfolio if all is in line with their objectives and risk appetite.

Most portfolio reviews tend to bring a sense of optimism, especially when reflecting on gains from the last 12 months. But with the ASX 300 and S&P 500 dropping -2 per cent and -18 per cent respectively in 2022, and bond prices reeling from rising interest rates, this year’s portfolio review probably brings some level of discomfort.

But long-term investors may find comfort in the fact that while stocks and bonds looked expensive at the end of 2021, today’s markets are more attractively priced.

So, when thinking about what opportunities lie ahead this year, the plan should be to add back portfolio exposures. While doing so, reflecting on the elements that underpin market returns can help investors focus on the components that increase a portfolio’s success and ignore those that detract.

Think through your asset allocations

The importance of disciplined asset allocation cannot be overstated. Well-regarded academic studies have concluded that approximately 90 per cent of the variability of portfolio returns stem from asset allocation, while security selection and market timing combined only account for 10 per cent.

So while both activities can be exciting, trying to pick that hot stock or dancing in and out of the market at just the right time probably isn’t worth the effort. In fact, most investment strategies based on catching lightening in a bottle are doomed to fail.

Honing in on the importance of disciplined asset allocation – well-constructed long term portfolios hinge on three basic investment principles. First, long-term investors build portfolios with a pronounced focus on equities. Second, prudent investors create portfolios with substantial diversification. And third, sensible investors create portfolios with tax considerations in mind.

Equities or similar growth assets enhance portfolio returns over the long term because higher risk assets typically deliver higher returns. Of course, higher risk assets increase the likelihood of losses. That said, higher returns coupled with the compounding effect of dividends and growth ultimately may result in greater wealth.

Consider your objectives

While 2022 was rough for markets, investors thinking of moving to cash or staying in cash should consider that long-term equity ownership (10 years or more) historically delivers vastly better returns than holding bonds or cash.

A recent study forecasts equity returns to range between 4-7 per cent, annualised for the next 10 years, while bonds are expected to deliver between 4-5 per cent over the same time period. And although forecasts do not guarantee performance, the difference while modest, translates into staggering wealth differentials over long periods of time.

That said, those with shorter to medium-term requirements for capital, like buying a house or putting a child through school in a few years, should consider adjusting their allocation towards defensive assets accordingly.

While equities provide growth opportunities over the long-term, allotting the entire portfolio to equities requires careful consideration.

The importance of diversification

Which, brings us to diversification. Good health is often the result of a mix of physical activity and a balanced diet rather than only relying on one or the other. Similarly, diversifying a portfolio by investing across a range of assets – typically assets that behave differently from each other – helps produce more stable returns by spreading risk.

Investors with under-diversified portfolios are more likely to face enormous pressure to make tactical moves when their concentrated strategy produces poor results.

Lastly, shrewd investors also consider the tax characteristics of each asset class, as improved after-tax returns produce more assets, ultimately strengthening portfolio results.

If in doubt, seek advice

With all the ready-made diversified portfolios, tools and information available to investors today, good investing is simple enough to DIY but, if in doubt, seek a financial adviser.

The benefits of good financial advice typically exceeds its expense and adds value to a portfolio’s bottom line. Just as a trainer motivates and guides you on diet or workout regimes, having an adviser in your corner can really help you get the financial results you are after.

Bike paths and gyms have been very busy so it’s clear that many are working hard on fitness-related resolutions.

But a healthy lifestyle also includes financial well-being, so let’s not forget about that. Here’s to a healthy and wealthy 2023!

Call us today to talk about your investment strategy for 2023. Call us on 03 5975 6855.

Source: Vanguard

Reproduced with permission of Vanguard Investments Australia Ltd

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