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 different types of investment assets.
First there are productive assets such as businesses (stocks are small pieces of the ownership of a business) and real estate. With productive assets you are looking to be rewarded by growing profits, rents and capital values.
The second category of investments are money based “interest only” assets such as bank deposits, government and corporate bonds. With money based assets you have surety of interest payments and return of nominal capital at maturity. However, interest only assets provide no capital and income growth, and their purchasing power is steadily eroded by inflation.
“Interest only” assets are sometimes referred to as “conservative” investments, however there is nothing conservative about having your capital and income steadily eroded by inflation, currently around 2% per annum in Australia.
“An investment that can’t beat inflation is useless. Only gains in purchasing power count.” Warren Buffett
All investments carry risk, be they stocks (business failure), property (buildings depreciate, land can become degraded), or “interest only” (inflation).
Focus on the specific stocks, real estate, or interest only investments you will make, and the income and growth they will provide. Avoid getting side tracked by macroeconomic discussions.
“Sales people 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 counselor 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