![Building a balanced portfolio is not nearly as hard as making an Olympic gymnastic team but it does require discipline ...](/content/dam/images/g/r/9/4/a/8/image.related.afrArticleLead.620x350.gr94ol.png/1473076813329.jpg)
One of the great things about the Olympic Games is that every four years you get to appreciate athletes and sports that don't enjoy saturation-level TV coverage.
Gymnastics is a personal favourite – there are few other sports with the constant risk factor that comes from the slightest slip or loss of balance.
No one needs to tell a gymnast the value of maintaining balance. And no one watching Olympic gymnasts is in any doubt about the hard work and dedication – usually from a young age – that has gone into getting to that point.
But investors often grapple with the issue of balance. Building a balanced portfolio is not nearly as hard as making an Olympic gymnastic team but it does require discipline and self-awareness.
The good news for investors is that unlike gymnastic routines, one small slip is unlikely to be devastating for long-term performance. But allowing portfolios to slip too far out of your risk comfort zone can be significant – particularly when a major market event comes along.
The two key issues for investors are setting the right asset allocation and rebalancing to stay within your risk "flags".
Determine your risk level
Understanding where to plant your risk "flags" has to be driven by your personal situation. If you are in career-best form, your capacity to take risk will be significantly higher than someone about to retire.
The simplest way for most is to invest in a multi-sector product offered by fund managers. These typically are designed around a target level of risk – they range from conservative, balanced, growth to high growth.
The same applies with superannuation – the default MySuper products typically cluster around a 70/30 growth-to-income asset split but you can opt for lower or higher exposures. With both super and non-super funds, the rebalancing of the portfolio is automatic.
It is when you drill down into the component parts of a portfolio that the complexity increases. Well-tested market solutions are available for those investors who do not want to spend a lot of time on asset allocation.
Many people have opted – via setting up a self-managed super fund (SMSF) – to be more engaged in managing their investments. Around half of SMSFs work with professional advisers to manage and invest their fund.
But the recent Vanguard/Investment Trends survey highlights many SMSFs have concentrated portfolios. The survey of more than 3500 SMSF trustees found that 38 per cent of their portfolios is invested in Australian shares. Of these, 28 per cent had at least half their share portfolio in bank/financial companies.
Routine no longer works
The reasons behind this are reasonably well understood – about half the assets are in pension or drawdown mode and high dividend payout shares are attractive thanks to franking credits. Wind back time to a few years ago and term deposits were also paying respectable yields so one of the primary objectives – to pay an income stream – could be comfortably achieved with share dividends and cash investments.
Right now the average SMSF investor may be feeling like a gymnast who has just discovered their standard routine is no longer working.
The question is how to recover that sense of balance.
Some are already taking steps to diversify their asset allocation via managed funds and ETFs. SMSF trustees are also flagging that they need more advice
So while setting the right asset allocation is important, building a broader financial plan can help get the balance right between the risks and potential returns.
Robin Bowerman is head of market strategy and communications at fund manager Vanguard Investments Australia.
AFR Contributor