When considering how to manage risk we often look at the split between income assets and growth assets and within this split the specific asset class allocations. The specific asset class allocations are the portion of a portfolio which is invested into income assets (such as cash, New Zealand and International fixed interest securities) and growth assets (such as New Zealand and Australian equities).
When we invest it is important to consider our goals and our risk profile. We usually work through a risk questionnaire that places us into one of five risk profiles. This risk profiling process is important as it should help match our investment objectives to our risk appetite.
Each of these risk profiles is mapped to an income and growth asset split. For example, we suggest that someone with a Balanced Risk profile have a portfolio that has a split of 40% income assets and 60% growth assets. We call this split of assets the target asset allocation.
Once we have invested our money the value of our actual holdings will change over time as each asset class can and may move at a different rate. These variations can move our portfolios away from our target asset allocation and if left unchecked our portfolio may assume greater or lesser risk than we would like. This in turn may result in our portfolios becoming more volatile, incurring unexpected losses, or underachieving against our investment objectives. We are currently going through a period of strong returns; growth assets (e.g. shares) have achieved high returns relative to income assets. If we model a 3% p.a. return on income assets and a 12% p.a. return on growth assets over a three year period, a Balanced Investor profile will have moved to a 34:66 split between income and growth assets.
It is important that we regularly review and compare our holdings against our target asset allocation, as well as our appetite for risk as our circumstances can change over time. Regular rebalancing keeps our portfolio on an even keel.
Our Private Wealth Research team produce a series of target asset allocations to suit a range of risk profiles. Details of these asset allocations are provided in our News & Views publication which is available in the Client portal area of this website.
There are many more risks to be aware of. For more information on these refer to the Investment Statements for your service.
Talk to your Investment Adviser if you would like to discuss what you currently hold and the best approach for you.
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