Investment Options – Asset Allocation

Discover the best asset allocation strategy for your needs

Asset allocation is deciding where you will invest your money. There are two fundamental choices, either “productive assets” such as stocks (businesses) and property, where you look to be rewarded by growing profits, rents and capital values. Or “interest only” assets, such as bank deposits and government bonds, where you have surety of income and return of nominal capital, but no long term growth of your income or capital.

You may choose a combination of these assets, and everyone needs adequate cash reserves.

All investments carry the risk of the permanent loss of capital, be they stocks (business failure), property (buildings depreciate, land can become degraded), or “interest only” (inflation).

Stocks and property are also subject to market fluctuations, however, market volatility is not to be confused with the permanent loss of capital. Price fluctuations sort themselves out over time, and intrinsic value always surfaces.

Government and corporate bonds, bank deposits and other “interest only” investments are referred to as being “safe”, however there is nothing safe about having the purchasing power of your capital steadily eroded by inflation. Indeed, government policy is to have 2% per year inflation. 

 “An investment that can’t beat inflation is useless. Only gains in purchasing power count.”  Warren Buffett

It is important to focus on the fundamentals of the stocks, property, or interest only investments you will make, and the income and growth they will provide. Avoid getting sidetracked by macroeconomic discussions.

“Salespeople like to divide investments into categories. It is a great way to sell investment advice, but not a good way to invest. A typical investment counsellor organisation goes out and they bring out their economist and he gives you this big macro picture. And they start working from there on down. Asset allocation recommendations – 65% in stocks, a certain percentage in bonds and cash – is total nonsense. We’re not interested in categories per se. We’re interested in value.”  Warren Buffett

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