Pete Wargent is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

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Pete Wargent

18 November 2012

Where property should sit in your investment portfolio: Pete Wargent

If I were to suggest an efficient (i.e. balancing risk and return) portfolio allocation for a young person to target a wealthy at retirement 65, it could look something like the below.  In order for a portfolio like this to work, you only need two things.

One is the discipline to be careful with your spending to ensure that you can pay a good amount into your investment portfolio each month.  The second thing you will need is time to allow the portfolio to compound and grow.

A diversified portfolio: the slow but sure route to wealth

Asset Class

Target %

ASX 200 Large Cap Index Fund

10

Small Ordinaries Index Fund

10

Vanguard Emerging Markets Shares Index

10

FTSE SET Large Cap Index (UK’s largest 30 companies)

10

High-Yield Corporate Bonds

10

Investment Grade Corporate Bonds

10

Capital Indexed Bonds (inflation hedged)

10

A-REIT Index  (property trusts)

10

ASX All Ordinaries Gold Index Fund

10

Cash

10

Total

100

 

Based upon historical averages, it has been suggested that it may be reasonable to expect a portfolio like the one in the table above to achieve average returns of 10% per year or higher.

It is diversified through funds, but also diversified in that the individual components of the portfolio do not act in a correlated manner.  In other words, while, for example, when stocks are not performing well other assets, such as bonds, may well be.

The portfolio includes assets that are traditionally used to hedge against deflation (gold mining companies and bonds) and also those that thrive in more inflationary economies, such as equities and A-REITS (what used to be called Listed Property Trusts - they invest mainly in commercial properties that may be beyond the reach of the individual investor).

Stocks are commonly acknowledged to be the best performing growth asset in terms of percentage capital growth measured over time.  Bonds are often considered to be lower risk than shares (in the event of a company being wound up and assets liquidated, debt holders and secured creditors rank higher than equity investors) and therefore tend to command a lower return.

Therefore, a portfolio of this nature is efficient as a fair percentage of the investor’s portfolio is exposed to equities, with the remainder a mixture of bonds, property and cash.

 

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