One of the main goals when considering an investment is to get a decent return – without taking too much risk. If we can achieve this over a sustained period, then generally speaking we’ll put ourselves in a good financial position.
So, how do we do this, particularly if we use the current investment environment as a starting position?
We need to consider that:
Interest rates - are low, meaning we get little to no return on bank deposits, term deposits, etc… If we consider inflation, which his above the rate of interest in most cases, then we’re actually losing money by keeping money in the bank. Safe, but not a good long-term investment strategy.
Property – be it residential or commercial, has had a good run over the last decade or so, thanks largely to low interest rates. Valuations are generally considered high by historical standards. There’s even talk of ‘bubbles’. For some the optimistic scenario is that property values don’t fall, they just plateau for the next 5-10 years.
Shares - again, there has been a terrific run in mainstream equity markets like the US and Australia. We’re now 10 years into a bull market, which is great except when you stop to think that a typical cycle lasts only 7. Again, the optimists point to their needing to be well above average growth in company profits to help support the market, but even then, it will be hard pressed to increase in value.
The long and the short of it is that the approach of buying and holding traditional asset classes will find it difficult to achieve satisfactory long-term returns. Certainly, not what they may have come to expect from the past decade or so.
Then there is risk – an often-overlooked element of investing. Would you risk 30% of your money to make 7%. Not likely, but that is what some well diversified portfolios (read ‘Balanced Funds’) did during the GFC. Likewise, today, the amount of potential upside is limited, but the downside is far more significant. We all know that there are numerous financial, geo-political, demographic and ideological risks in the market. We’ve simply ‘tuned out’ when it comes to investing, or put another way, we’re ignoring the risk.
So, what can we do?
It all depends on how you approach investing. Do you simply buy and hold then hope for the best? Do you look for value? Growth? Dividends?
One approach that is increasingly relevant today is “Goals Based Investing”. It’s been around for a long time in the institutional world, but is increasingly accessible to other investors. Examples of Goals Based investors include managers like The Future Fund and The Harvard University Endowment Fund.
The Association of Goals Based Advice (AGBA) says “Goals based advice quite simply links a client’s individual goals directly to the design of their portfolios, so the likelihood of achieving those goals is improved.” That clearly makes sense, but how do you do it?
In reality, there are many ways to be a Goals Based investor, but there are a few fundamental beliefs that seem to be common:
Have the ability to invest into a wide range of asset types – not just the traditional ones.
Be prepared to be dynamic in moving your capital between asset classes – don’t just set and forget
Ignore benchmarks often bandied around in the media or at BBQ’s (such as the ASX200, bank stocks, etc…) - they are not relevant to your goals.
Be medium to long-term focused – trying to time the market is a mug’s game over the longer-term.
By taking a Goals Based Investing approach, not only do you align your investments with your goals, you also tend to remove a lot of behavioural finance risks of buying when markets are hot (high) and selling into panic (low). It can also help with other technical risks such as sequencing risk (protecting your capital from permanent loss when using it in a drawdown phase, such as a superannuation pension).
While we might all like to invest like the Future Fund the reality is that they have access to different types of investments, but there are a growing range of financial advisers and fund managers helping people with building and managing Goals Based Portfolios.
There is light at the end of the tunnel.