Ask the Analyst: How do you tell if you’re in the right portfolio for your goals?

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This article contains general information only. It has been prepared without taking into account your objectives, financial situation or needs. Consider whether it is appropriate for you before acting on it.

In our Ask the Analyst series, Spaceship community members send in their questions about investing. 

We were recently asked:

How do you tell if you’re in the right portfolio for your situation? 

We put it to our Spaceship Voyager Investment Team. They have a different way of looking at the question. 

Over to Jason Sedawie, Spaceship VP of Investments. 

The right question is: what returns do you actually need, and over what timeframe?

Here's why. Historically, the portfolio with the highest returns has also generally been the one with the highest losses. The "best" portfolio is the one that matches your actual situation.

So before we think about returns, ask yourself three things:

1. Time horizon.

When do you actually need this money? 

If it’s less than three years, some investors may prefer portfolios with higher allocations to cash and bonds. 

If it’s from three to five years, some investors may prefer a more balanced portfolio with a moderate equity allocation. 

For seven or more years, some investors may be more comfortable with higher exposure to equities because they have more time to ride out periods of market volatility, i.e. you have more time to ride out the bad years. 

In general, if you're 25 and saving for retirement at 65, you've got 40 years until then, so short-term volatility may not matter as much as long-term compounding does. 

Remember: This article contains general information only. It has been prepared without taking into account your objectives, financial situation or needs. Consider whether it is appropriate for you before acting on it. Past performance is not a reliable indicator of future performance and returns aren’t guaranteed. 

2. Risk tolerance.

It’s not what you say it is on a questionnaire, it’s how comfortable you actually are staying invested when the markets drop 30%. If a paper loss of 30% would have you selling at the bottom, you're not actually high-risk-tolerant regardless of what you tick on a form. Be honest with yourself here. The best portfolio you'll stick with beats the theoretically optimal portfolio if you panic out of it every single time.

3. What's the money for?

A house deposit in four years needs a different portfolio than retirement in 40 years. 

Mixing the two creates problems both ways: too aggressive for the house deposit (it might not be there when you need it), and too conservative for retirement (you're leaving compounding on the table).

In general, when it comes to long-term investing, you’re choosing the right trade-off for your situation. 

Historically, higher returns have been aligned with higher equity exposure, more volatility, and a longer timeframe required. 

More predictable returns have been aligned with more cash and bonds, lower volatility, and a shorter timeframe required.So instead of choosing the "best returns" — you're choosing the right trade-off for your situation.

Keep in mind that past performance is not a reliable indicator of future performance and returns aren't guaranteed. You should seek personal financial advice from a professional such as a tax accountant or financial planner for specific advice. If you're considering an investment, make sure you understand the risks and review the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD).

Why we're long-term investors

We’re long-term investors at Spaceship, which means we think it’s a good idea to pick a strategy you will be comfortable holding in a downturn. Many people obsess about picking the perfect portfolio and then sabotage it by switching every time markets move.

Historically, investors who stayed invested through volatility have tended to achieve better long-term outcomes than those who switched frequently, though past performance isn’t a reliable indicator of future performance. 

Dollar-cost averaging is a long-term investment strategy some investors choose to help them invest through the good times and the bad.  When markets are up, their contributions buy fewer units. When markets are down, the same dollars buy more units at lower prices. So they’re working with volatility instead of trying to time the market. Remember to consider what’s right for you and your needs. 

A strategy you stick with through volatility has historically tended to serve investors better than a theoretically optimal strategy you exit at the first sign of loss. Past performance isn’t a reliable indicator of future performance.