Asset Allocation

As I wrote earlier I had initially decided to divide my capital with:

30% being the 'safety bucket' and
70% being the 'growth bucket'

And then further divide my growth bucket into 50% blue chip and 20% speculation.

To be truly safe it was suggested to me that you should only use the safety bucket for things like term deposits, bonds etc. But I am seriously starting to wonder, is a term deposit ever really a 'safe' investment? Just barely beating the rate of inflation because the stock market is 'unsafe'?

I wonder if it is just as risky NOT to invest the 'safety bucket' in the stock market across a few markets/sectors? So perhaps a more intelligent asset allocation for me would be:

80% Blue Chip
20% Speculation

or perhaps even:

70% Blue Chip
30% Speculation

In my current situation this would mean I would have $48,000 for speculation which would give me a significantly better starting position than the $22,400 I would have had otherwise, and frankly I would feel just as safe with my 70% spread across various blue chip sectors.

I have read a previous post about how everyone allocates their assets so there is no need for everyone to repeat how they do it, I was just curious what people consider to be a 'safe' investment, keeping in mind I realise that no investment is ever truly safe....but what do you consider to be a long-term solid investment?

CTP:

Another way of looking at your "safety bucket" would be to consider the underlying "substance" of the company you are considering investing in.

e.g. if you were thinking of placing funds on a term deposit with the Commonwealth Bank, presumably you would feel the funds were entirely safe. Most of us have the impression that money in the bank is guaranteed. It is not. If you have faith in the CBA, instead of putting money in a term deposit you could buy CBA shares, looking for a low point of entry, the dividends and franking credits will provide you with more income than that of anything other than a very long period term deposit, and you will most probably have a considerable chance of a capital gain. It depends a bit on your time frame. Say you wanted to invest for 12 months. If it were me, I'd go for the shares which will likely move up in price inthat time, you get a reasonable income off the investment, and the security still remains in the same basic company.

Others will probably have different points of view, and this does not constitute advice. It's just what I would do If I were thinking of investing the kinds of funds you are talking about.

The other thing you may not have considered is Listed Property Trusts. Property is out of favour at present and consequently buy-in prices are quite reasonable. If you want something for the fairly long term, you could consider these as they provide a good income and will hopefully provide capital gain again in the future as the shares/property cycle changes again.

Good luck and let us know how you go.

Julia

Hi Julia,

Thanks for your reply and your advice. You make an excellent point and I really agree with what you are saying. My main goal with the 'safety bucket' is long term compound growth, in other words I won't even touch this money for 30 years or more (I'm 22) this is basically my get-rich-slow plan so that if all my businesses fail, I blow all my other money and everything goes wrong, I will still end up as a multi-millionaire over time as a result of compound interest.

In other words, I wouldn't be looking for income from this money, I would re-invest any dividends/interest. I doubt anyone could say that they would choose a term deposit over shares in the bank itself, I totally agree with you there.

With the property trusts I know nothing about them so I will definitely try and get a few books or articles about them to see what I can learn, I guess the best thing when you're talking safety is to spread it out over a number of investments to dilute the risk.

Thanks again for your advice Julia!

There was a study done which I read probably 6-8weeks ago that you would have been better of investing funds in the major bank shares than with a term deposit.
The dividends, capital growth and franking credits put it above the highest yield from term deposits

As for the speculation part, I think committing 10% is a safe way to go
Depending on how well you research a company will also govern if you want to invest more in % terms.

I would keep some in cash as there will be opportunities such as floats (Telstra!), share issues etc. So invest 70% now and plan to invest the rest over a year.

If you are nopt an experienced investor then I would invest only small amounts in speccies. This will help train you.
Secondly, don't invest in too many stocks, 9 maximum so you can really follow them and understand them.

Some stocks I would suggest you consider would be CSL, Oxiana, Qantas, Woodside, CBA.

Thanks for your suggestions Knobby I will definitely have a look into everything you've suggested. And bvbfan I think you are totally right there, I would be insane to lock up my money in term deposits when I would get a better return from owning part of the bank itself (side note: I always find it funny to think if I have $1000 in a company I probably don't even own more than a few of the company's chairs ha ha ha)

I've actually (at the suggestion of people on this forum) been reading books by Daryl Guppy and am going to take his approach to speculation over the next while, I want to have a good think about it first though and make sure I do it at a time when I can give it my full attention.

Fundamentally, if you want something "safe" then in my opinion you want something which is at least exposed to different risks to that of your "growth" funds.

I am assuming that your "growth" funds are to be used for long positions in shares that you select. Therefore, if it were me, I would be looking at:

(Note that specific stocks and accounts mentioned are for example only and are not intended as a recommendation. All my posts are my opinion only and are not investment advice etc.)

(listed in no particular order)

Cash - At call (ING or similar)

Term Deposits - but only if the interest rate outlook is favourable compared to holding cash at call.

Bonds - Via a managed fund if you don't want to be directly involved in bonds.

Listed property - Or a managed fund investing in it.

Managed share funds.

Commodities - Probably by means of buying and holding the major producers such as BHP, Rio Tinto, Woodside Petroleum etc. Speculative mining stocks do not fit into this category - if you trade them then they belong in the "growth" portfolio IMO.

Precious metals - physical gold and/or silver. Also the stocks of mining companies such as Newcrest (gold) or Macmin (Silver). Note that Macmin is somewhat speculative and that silver stocks in general are few and far between (most silver produced is a byproduct of other minerals) so there's not much to choose from with silver. Can still have a place in investment though.

Foreign currencies - actual deposits in major currencies such as US Dollars, Euro, Yen etc. as opposed to leveraged forex trading which is a "high risk" strategy which IMO shouldn't involve "safe" funds.

Hedge funds - Also called "absolute return funds". Personally I wouldn't put too much in but there could be a place for investing in these via a managed fund which spreads the risk across lots of different hedge funds. A "fund of funds" if you like.

IMO all of these have their merits but there are some that you wouldn't want to put too much into. You ought to look at all of them though and understand what is involved even if you decide that they're not for you.

At various points in time you would have gained or lost significantly by holding each of these asset classes (cash losses are due to inflation). You could also have made $$$ trading them (except cash and hedge funds which are generally impractical to trade).

Make sure you understand these asset classes before you decide in which to invest. Don't assume that just becasue something lost over the past 5 years that it will always lose or vice versa. And spread the risk.

Thanks again Smurf! Your advice is extremely valued and I'll look into each of these categories myself before I make a decision. I really appreciate all your help.