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Articles
Buckle up even when markets are good
Making a smooth transition to retirement
What it means to be a baby boomer?
Superannuation Simplification Plan
Market Notes - February 2007
Market Update - General - February 2007
Investment Markets Data - To 28th February 07.
‘Cloning' of Trusts
Is your business ready for sale?
Tax pain before super gains
What index record means for investors
Do you have an end game?
Market Notes - January 2007
Market Update - General - January 2007
Investment Markets Data - To 31st January 07.
True performance results - a real reason to celebrate
Christmas Parties - FBT & Income Tax
One of the best gifts you can give your children this year.
Market Notes - December 2006
Market Update - General - December 2006
Investment Markets Data - To 31st December 06.
Buckle up even when markets are good

Life would be so much simpler if investing was just about performance.

That point was driven home by an investor recently who declared he was selling all his fixed interest investments and putting 100% of the money into shares.


The reason? Performance of the sharemarket has been so strong for so long that he felt it no longer made sense to have money in fixed interest.

That is akin to saying you haven't had a car crash for the past five or six years so you no longer need to wear a seat belt. The whole point about wearing a seat belt is that you have it on to protect you against that unexpected crash.

The role of fixed interest in a portfolio is to help lower your risk but you can see why our investor was beguiled by the performance numbers: Vanguard's retail Australian share index fund that tracks the market performance has returned 23.8% (before fees) for one year to the end of February, 25.6% for three years and 16.3% for five years.

By contrast a diversified index bond fund for the same time periods has returned 4.8%, 6.1% and 7.1%. Solid numbers in a low inflation environment but hardly the sort of thing to get the blood pumping when double digit share market returns have become expected fare.

Look at the issue from the opposite perspective: if the sharemarket returns were -20% and the bond portfolio was +3% who would be lining up to sell all their fixed interest investments and be completely exposed to the risk of the sharemarket? This is the problem with using past performance to try and predict the future and why every financial planner and fund manager worth their salt will warn you of the risk of doing that.

For investors getting a good understanding of the risks they are taking within their portfolio can be difficult to get an accurate reading on. The key is to understand the potential volatility that is embedded in the different asset classes - be it shares, property or fixed interest.

If you want to earn a good return the tradeoff is you have to take some risk. The trick is to keep the risk factor firmly under your control. This is an issue that retirees in particular need to spend time understanding. When you are working and you lose money on an investment it hurts but time and the fact you can replenish your capital base at least is open as a road to recovery.

As a retiree if there is a major market crash and you lose 30 or 40 per cent of your capital that is virtually impossible to replace - unless you are fit enough to return to the workforce.

So at times like these it pays to remember why cars have safety belts and to think carefully about the role which fixed interest plays in your portfolio. 

 

Smart Investing
By Robin Bowerman
8 September 2006

Principal & Head of Retail, Vanguard Investments Australia
www.vanguard.com.au


30th-March-2007

        
FuturePlan Partners Pty Ltd, ACN 097 032 114, Corporate Authorised Representative of
SECURITOR Financial Group Limited, ABN 48 009 189 495, AFSL and Australian Credit License 240687,
Level 7, 530 Collins Street , Melbourne VIC 3000.