Whether you are an experienced investor, operate your own Self Managed Superannuation Fund or simply have Superannuation Guarantee contributions in a managed superannuation account, it is important to understand the basics of portfolio management. After all, it is your money and its growth should be maximised.

An essential consideration in making any investment should be to clearly establish your objective, otherwise how do you know which asset class is best suited to its achievement?

Are you making the investment to finance your current lifestyle objectives? Is it part of a longer-term objective to provide for your retirement or part of a savings plan for another future purpose?

Your next requirement should be an understanding of the asset classes. Broadly, these classes can be grouped into:

• equities (shares or partial ownership of a business)
• interest bearing and cash products
• property

There are a myriad of options within each to fulfil different purposes and all carry a degree of risk. The value of each type of investment moves with the economic cycle, although the extent is often variable. Advisers recommend a balanced portfolio, so if one class is performing poorly it can be offset by better performance in another sector. This diversity reduces the chance of amazing gains, but equally protects against spectacular losses.

Knowing your risk profile is another key requirement in establishing your investment portfolio. Risk and return tend to go hand-in-hand. For the more aggressive investor, timing is everything. Endeavour to buy somewhere near the bottom of a cycle and sell near the top, but do not expect to be exact.

The current Australian investment market

The potential for a rising interest rate is influencing decisions within all sectors of Australia’s current investment market.

Australia has seen a recent boom in residential housing prices, which has encouraged many investors to accumulate more than one investment property. Interest rates have remained low and Australia’s economy, in contrast to the rest of the world, has performed well. Property prices have levelled but remain high.

Shares made a comeback over the last 12 months, which coincided with a slowdown in the price growth of property. Recent interest rate rises, although small, have also partially contributed to this shift. However, the global economy is gaining momentum and the prospect of further interest rate rises is looming.

This will put pressure on both share and property prices as investors see better potential returns in cash and fixed interest investments. Many fund managers have already gone overweight in this sector and underweight in shares.

For the investor heavily weighted to geared property, the scenario is now one of probably lesser, if any, short-term price growth combined with higher interest payments. Share prices also come under pressure as interest rates rise.

Returns by way of dividends may not be as attractive as interest-bearing deposits. Therefore fewer willing buyers will be available, causing prices to fall and growth to diminish.

What now?

Investors may want to reduce their exposure to residential property and resource shares, and increase assets allocated to fixed interest products.

International shares that were badly affected by September 11 and the American slowdown may still have some upside, but global interest rate prospects are for increases, so gains could be limited. 

However, this doesn’t take into consideration the movement in value of the Aussie dollar against the US and other major currencies. A lower Australian dollar means an increased relative value of currently held overseas shareholdings. As an exporting nation, it also means better trade opportunities for companies in this sector.

If property assets are debt-free, the effect of any interest rate rises and growth slowdown will not be as noticeable and holding is certainly a good option.

With Australian shares, most investors will move back to the more solid, less debt-ridden companies. Opportunities also remain in the small cap sector.

Now is a good time to evaluate your portfolio’s structure and assess your exposure to each sector. Rebalance the weightings in accordance with your objectives and risk profile to take advantage of profits in one sector and increase your opportunity to make gains in others, while remaining prepared to change these weightings as the cycle moves on.

Note: This has been prepared for general information only. Before making any investment decision you should consider whether it is appropriate for your financial situation, needs and objectives. Any opinions expressed are our judgement at the time of writing and are subject to change. Seek professional advice before making any decision. Past performance is no guarantee to future performance.

Vaughan Liddelow
CCI Integrated Financial Solutions
Authorised Representative No. 253462. Epic Adviser Solutions
AFS Licensee 227748
Phone: 9365 7544 or e-mail: liddelow@cciwa.com