What are your long-term investment goals? What is your risk profile? Answer these questions loudly to yourself because these would determine what mix of assets will see you performing through the roof in terms of your SMSF fund.
Age and psychology
The amount of risk you can take depends upon the number of summers you have seen and your psychological inclination. There is a part of us that gets risk averse as soon as we begin to age. So, old investors are more inclined towards diversifying their assets the low risk way. This can largely mean preferring bonds and cash over equities. They might not show penchant for long-term capital growth and you may find them shopping for the ‘present moment’. Anything which brings them income in a short run is more than welcome for them.
Equities over bonds and cash or otherwise
So it is safe to say that anyone closing on retirement must not have his assets placed entirely in equities or high-risk volatile investment vehicles of the market. Those looking for a five year horizon won’t do great with volatile investments either. After all, what is considered high risk-high gain might mellow down twice over five years into something much more moderate.
If retirement is far away, SMSF asset allocation should be sizeably bent towards equities and vehicles of long-term capital growth. Typically, your know-how may determine the kind of asset class you want your portfolio to be dominant in. If you know equities more than bonds, place your trust in them and vice versa.
Asset diversification
The great point about asset diversification is that it allows a smart trade off between risks and returns. Think it this way: no matter how great or poorly the economy is working; there will be certain asset classes which will always be better placed than others. Diversification helps you increase your portfolio leverage by buying and selling over the asset classes according to the needs of the market and performing the portfolio balancing act.
Which among conservative, balanced and high-growth portfolio leanings do you have?
