Asset allocation is the practice of deciding which assets to invest in, and where. It is driven by the need to diversify, one of the unshakeable mantras of investing. At Netwealth we allocate capital globally – to better protect wealth and to best position investors to achieve returns which meet their investment goals.
Asset allocation has long been considered one of the most important decisions an investor can make – it typically makes the biggest difference to investment returns. In broad terms, it is deciding which percentage of assets should be invested in stocks, bonds and other securities, and choosing on which sector or region to focus.
Why global asset allocation?
Investors should diversify chiefly because different assets perform better at different times. This is not only due to variations in how assets behave and prevailing valuations, but also in response to changes in expectations of the economy and how companies perform in future, and on account of geographic nuances.
At the highest level, shares may outperform one year, while bonds or other assets could do better the next. Therefore, a sensible portfolio should have a mix of assets, which will vary depending on the risk tolerance of the individual.
The challenge is that historic evidence shows it is difficult to predict when various factors will affect the returns of different asset classes, especially as markets often send conflicting signals for future performance. For instance, since the global financial crisis US stocks have shown stronger profitability than their European and Japanese counterparts.
However, as a result, this has made US stocks popular among investors, and significantly more expensive both relative to the other regions and to their own history. Given it’s hard to tell when markets will switch from favouring the growth of US companies to the cheaper stocks of Europe and Japan, it makes sense to maintain a broad exposure to them all.
Our approach to allocating capital
Our investment approach aims to give clients the best chance of meeting their investment goals.
Deciding the strategic mix of which assets to invest in over the long term will always be the main driver of our portfolio returns – and is designed to maximise returns for each client’s preferred level of risk by investing broadly, and internationally.
The range of assets we invest in is shown below and described in more detail here. This list is not definitive, as we may invest in other areas if there is a clear benefit. All of our investments are subject to regular review.
- Cash and money market instruments
- Domestic and international government bonds, including inflation-linked issues
- Corporate and emerging market bonds
- Domestic and international developed market equities
- Emerging market equities
Steps in our asset allocation process
We explore our investment approach in detail here, with a summary of the steps we take below.