Time to spring clean the portfolio through tactics and strategy

Resetting your investments to keep in tune with the times is essential ... here’s a guide.

September is the perfect time to spring clean your investment portfolio: Think about it, we’ve just had the earnings season on the sharemarket, we have a clear scenario in property (now we know the government is not going to touch negative gearing) and for that extra guidance ... the Future Fund has very usefully released its investment allocation for the year ahead.

Of course there is a range of fears in the markets — as always publicity-seeking investment commentators, playing games we may never understand, can be found to express severe gloom about any asset class. But in the end you have to make decisions on your own.

For every investor there are two key objectives in the spring clean — a tactical touch-up and a strategic review — one is as ­important as the other. Let’s start with the tactical touch-up.

What you must do now: tactical

In the Australian market the outstanding contemporary issue for most investors is dealing with super-low interest rates … low cash rates force investors to take more risks.

The spring clean should tweak your investment setting to capture these outstanding factors now emerging across the investment landscape:
● Bank shares may still represent an unhealthily large proportion of assets
● Mining shares — after a torrid few years — may be under-represented
● Reasonable income, or yield, ­remains scarce and expensive as blue chips decline and A-REITs (property trusts) come into favour
● Many small cap stocks are emerging with better growth prospects than large cap players
● Better value may be found in markets outside Australia

To reset a portfolio takes a lot more than pressing a “sell” button with an online broker — it may mean admitting defeat on the stocks that have failed — or, tougher still, converting your perception that some stocks have “topped out” into hard action by selling something that has served you well. But this is the essence of tactical investing — you simply must bite the bullet.

In making tactical changes ­remember two key issues:

1. Foreign exchange
We shouldn’t speculate, but most investors would agree the Australian dollar, after falling from $US1.10 to $US0.76, is not going to do that sort of drop again anytime soon — on this basis offshore ­investing of any description ­becomes simply a diversification play — the prospects of a so-called “currency tailwind” have now diminished

2. Interest Rates
In the same vein it’s equally fruitless to try to guess where interest rates will be in the near term but on a 12-month view you might safely assume that they will remain in sight of current super-low settings — a 1.5 per cent official cash rate can be taken as a guideline.

In accepting these two assumptions in relation to foreign exchange and interest rates we can at least make a string of tactical decisions with some confidence.

As for the overarching challenge of low rates, the outstanding question must be: Have you taken full advantage of record low rates? If your mortgage is close to 5 per cent you are paying too much.

On the other side of the coin — with cash struggling to pay 2 per cent — every investor will need to accept that the “hunt for yield” remains the outstanding tactical challenge of this period.

For the past five years it has been bank stocks and industrial blue chips that have paid decent income. In the year ahead it may shift away from banks and blue chips such as Telstra to industrials, small caps and A-REITs.

What you must always do: strategic

As you may already know, success inside investment markets comes down to one key concept — asset allocation. In other words, the ­design or balance of your investments will ultimately dictate how it all turns out.

Behind the torrent of noise in the markets and the legion of people looking to make money from your need to manage your own portfolio there are core fundamentals you must never forget — balance your investments so that they can take just about anything life throws up — not just a sharemarket crash, but a divorce or ­inflation, or deflation.

Diversification means setting the allocation between shares, property, bonds, cash and alternative assets that is right for you.

We know that many Australian investors have perhaps 50 per cent or more in Australian shares yet we see the Future Fund reporting that in the 12 months to June 30 it had a mere 6.3 per cent in Australian shares.

The Future Fund managed to double its money over the last decade.

Does that mean we are all wrong? Not at all: the Future Fund operates in a different hemisphere than mere mortal investors.

But it is a guide that our concept of “balance” may need to widen a little — to include more overseas investments and more “alternative” investments — and that our notion of “safe” levels of cash may need to be revisited (the Future Fund has a whopping 21.7 per cent in cash).

Allowing for the rational fears of the Future Fund (that markets are overpriced due to negative ­interest rates) — yet setting aside the shrieks from excitable market observers (that both the stockmarket and the property market are about to topple over) — the private investor is left with a double challenge: Seeking income and finding growth.

At first glance this might sound simplistic but remember there are periods when investors have to worry about inflation. That’s not on the agenda at this time, and neither is recession or depression — at least in Australia.

And though our economic outlook may be subdued, at least the Reserve Bank of Australia has the scope for perhaps two more interest rate cuts and each of those will give both shares and property a sugar hit.

Over the long term the main issue in investing is to keep “in the market” and the first step here is to spring clean. So sell that stock, buy that fund, refinance that mortgage and give yourself a pat on the back if your cash levels are a little higher than an adviser might have recommended — you’ve got something in common with the Future Fund.