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Written by Aaron Alston – Financial Adviser
Asset allocation in simple terms is the process of balancing risk and return in a portfolio by investing across different asset classes. The major asset classes include shares (Australian, US, International), property & infrastructure, bonds/fixed interest & cash.
For example, an aggressive investor risk profile may have up to 100% of investable assets in growth (shares & property) and 0% of defensive assets (cash, fixed interest, and bonds). If the market was to increase/decrease 20% it is important to know what you stand to gain or lose based on your asset allocation.
Scenario 1 – Example if 100% invested in the market
Super Balance – $500 000 x 20% increase/decrease
= $100 000 loss/gain
A balanced risk profile may have up to 70% investable assets in growth (shares) and 30% of defensive assets (cash and bonds). Again, if the market increases/decreases 20% based on a balanced risk profile the results may be below.
Scenario 2 – Example if 70% invested in the market
Super Balance – $500 000 x 0.7 x 20% increase/decrease
= $70 000 loss/gain (As there is only 70% invested in the market, the potential for gains/losses is reduced)
The above highlights just how important asset allocation is in the lead up until retirement. A $500 000 balance in separate risk profiles can lead to various results. Are you prepared to accept rapid gains if it also means you make a negative return over a short period of time?? You may compare your superfund to a colleague/friend who comments about how well their fund has performed. Their fund may have performed 1% higher than yours however they could be much more aggressively invested compared to you.
Am I in the right asset allocation for my age? Hudson can take you through a risk profile questionnaire and to determine the right risk profile & tailor your asset allocation based on your current circumstances. Hudson has 7 risks that we can discuss with you as you. You may be trying to accumulate wealth and grow your assets, protect your capital as you are inching towards retirement/already retired or a combination of both.
The above information is general information only and does not consider your financial situation, circumstances and needs. Should you wish to speak to an adviser about the above contact Hudson on 1800 804 296.