Concentration risk is the increase in investment risk that comes about from not sufficiently diversifying your portfolio. In other words, too much money is concentrated in too few assets, sectors or geographical markets.

This can happen:

• Intentionally, because you have a strong belief that a particular share or sector, such as resources, banks or property, is likely to outperform in the future.
• Unintentionally, through asset performance. One or two shares deliver spectacular gains, making the entire portfolio more sensitive to moves in just a couple of assets. Or maybe shares as a whole enjoy a period of strong growth. Even though you hold a large number of different shares, the increased exposure to one asset class increases the risk to your portfolio.
• Accidentally, through poor asset selection. Nine out of the ten top companies that make up the MSCI World Index also appear on the top ten list of the main US index, the S&P 500. Investing in two funds, one that tracks the world market and one that tracks the US market won’t deliver the level of diversification you might expect.

Managing your risk

The solution to concentration risk is our old friend, diversification.

• Appreciate the importance of asset allocation, the art of spreading your money across the main asset classes of shares, property, fixed interest and cash. Ensure your asset allocation matches your tolerance to investment risk.
• Diversify within each asset class. Holding the big four banks is not a diversified share portfolio. If property is your thing, buying four one-bedroom apartments in the same building, or even in the same area, creates a huge concentration risk.
• Rebalance your portfolio to keep it broadly in line with your ideal asset allocation. This may create a tax liability, but often it’s better to pay some tax than to carry too high a level of concentration risk.
• Understand each investment and its role in your portfolio. Does share fund A hold similar shares as share fund B? Do they both have the same strategy?
• Get a professional opinion. Even if you are confident in making your own investment decisions it’s wise to run them by a licensed adviser.

It’s surprisingly common for investors to develop an emotional attachment to particular shares or properties they own. Concentration risk can also increase over time due to lack of attention. Your financial planner will assess your portfolio for hidden concentration risk and help you achieve a better balance of investments.

For more information about managing your investments, contact our office on (02) 4926 2300 or email success@leenanetempleton.com.au

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Debt recycling is the process of replacing mortgage debt, or bad debt, with investment debt, which is known as good debt. 

This strategy enables investors to start building wealth while they’re still paying off their home. As equity is built up in their home, funds are re-drawn and invested. Income from these investments can be used to further reduce the mortgage balance, while the growth component contributes to wealth accumulation.

This is how debt recycling worked for one couple.

Mark and Jane have built up considerable equity in their home, and upon advice from their financial planner decided to make that equity work harder for them. The couple currently owes $240,000 on their home, which is valued at $400,000. Their licensed planner recommends Mark and Jane implement a debt recycling strategy, refinancing their current loan to give them a $300,000 loan limit. This releases $60,000 of available equity for investment.  

Mark and Jane’s planner recommends they invest their $60,000 equity into a portfolio of managed investments specifically chosen for income potential. After one year, their portfolio has grown in value to $65,000, and yielded an income of $4,000 which is used to reduce their mortgage further. After regular loan repayments, their mortgage balance is $230,000 after the first year. The couple then draw the extra $10,000 in equity to make an additional contribution to their investment portfolio. This process is repeated each year until their mortgage is extinguished.

Debt recycling can benefit investors prepared to invest not just funds, but also time and patience. To learn if it would be appropriate for you, contact your licensed financial planner.

To discuss debt recycling in action call (02) 4926 2300 or email us. 

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As we approach retirement some people start to panic a little wondering if they are truly looking forward to the time of their life when they no longer have to work. All of a sudden something they have been dreaming of starts to seem real! Instead of worrying, have a read of the following tips and if necessary, act now. After all, it’s your future – and it could be here sooner than you think.

1: What do you want and how will you get it?

What are your goals and objectives for your retirement? Write out a plan that sees you enjoying the fruits of your labours. Then make sure your finances can achieve your goals. If not, do something about it now while you still have time. Be realistic and set achievable timeframes.

2: It’s not just about returns; remember the risks

Every investment has some degree of risk. Cash is considered the safest as there’s a good chance your money will still be in the bank when you need it. The downside is that it pays the lowest return; it isn’t tax effective; and doesn’t tend to keep pace with inflation. To achieve higher returns and make your money work harder, you need to take appropriate risk. Understand the differences between cash, fixed interest, shares and property and make your decisions wisely.

3: Share it around

To help reduce risk, share your investments across several asset classes and within those asset classes as well. The right balance will depend on your financial objectives, the amount of time you have available to invest, and your risk tolerance.

4: Don’t forget super…

Superannuation will be your bank account when you are no longer working so you should be considering ways to boost your superannuation balance prior to retirement. But be aware the tax benefits are not always equal so make sure you have a balance of inside-super and outside-super investments. 

5: …or tax

Tax is the trickiest area of all. Always make sure you get good advice on investing tax-effectively. A simple restructure of an underlying asset, investment vehicle or ownership structure could help you to minimise the amount of tax you pay and maximise your after-tax return.

6: Retirement can last another lifetime

With medical technology and improved lifestyles we are living much longer than our previous generations. The older you get, the longer you’re likely to live. If you’ve managed to survive early risks, such as accidents or illnesses, your life expectancy actually increases. Be prepared for a longer retirement than your parents. This means that your money must last longer, so don’t be too conservative with your investments, speak with one of Leenane Templetons financial advisers to discuss your investments and risk.

7: Stay cool

You are in this for the long term so when markets fluctuate and investments unexpectedly fall in value, don’t panic and sell. Sit down with your adviser, review your portfolio and stay focused on your long-term goals and objectives. 

8: Keep learning

You are never too old to learn. Financial advisers have an important role in giving you tailored guidance, but you still need to make your own informed decisions about your financial plan. Make sure you understand your plan and if not, ask questions or do some research.

To discuss your retirement
Call (02) 4926 2300 or email us. 

Our team of award winning financial planners are available to discuss your retirement needs. 

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The foundations of risk and return – Risk is integral to investing. This can be a frightening thought, but risk shouldn’t necessarily be feared, as without it there is less opportunity for reward. Quite simply, the higher the return you want from your investments over a particular period, the more short-term volatility (or risk) you have to accept in the value of your investments. Granted, if you’re happy to receive the bank deposit rate, you can put all your money in the bank, safe in the knowledge that the account balance will rise a small amount every day. But if you want higher returns, you’ll have to take on more risk and consider other investments, such as shares, fixed income, commodities and property.

Accepting short-term volatility for higher returns

Why do some investments offer higher returns than bank deposits? Each investment has different characteristics and offers varying potential levels of return. For example, a share’s return over a particular period is uncertain as the company’s profits are unpredictable, therefore share owners require a greater return than they would accept from bank deposits. What share investors are implicitly saying is “I want a higher return, but understand that I have to accept volatility in returns over the short term”.

Looking at risk from a longer-term perspective

Risk is the possibility or probability of loss. But if you’re talking about one of those frequent falls in a share price on a particular day, is that really an important loss? Firstly, it’s only a loss if you sell the investment. Secondly, most of the time these ’losses‘ are temporary and prices soon bounce back; this is the usual volatility of the stock market. The reason this is important is that the financial industry has defined an asset’s risk as the extent to which its price fluctuates; in other words, risk is the likelihood of an asset not achieving its long-term expected return over a short period.

Perhaps the risk that you should really care about is the possibility of an asset not achieving its expected return over the long term, rather than over the short term. In the case of equity share, such a situation might arise if the company in question goes out of business. So important risk relates to permanent loss of capital, not day-to-day losses of which the vast majority are temporary.

Instead of thinking of volatility as a risk (and therefore something to be concerned about), think of it as the cost of the longer-term return. And, if you’re able to ignore the fluctuations in the value of your investments from day-to-day and month-to-month, it’s a cost you won’t notice.

Diversification is a fundamental principle of investing

Avoiding permanent loss of capital requires careful analysis of the investment in question. But, if a company does go out of business, you can reduce the impact by having diversified your portfolio across a number of companies and even asset classes. 

For example, a simple multi-asset portfolio could include shares, government bonds, corporate bonds and cash. Given each asset class has its own expected return, they can be combined in different ways to target a particular return. If we assume that bank deposit rates are 0 per cent, the expected return from bonds is 5 per cent, and that from shares is 10 per cent; to aim for a return of 5 per cent, you can either invest the entire portfolio in bonds, or split the portfolio 50/50 between shares and bank deposits (or one of many other possible combinations).

Everyone will have a different attitude to risk and, therefore, the returns they require. By adjusting your combination of investments you can control the level of risk and affect your potential returns. This is known as asset allocation and is essential for effective portfolio management.

Source: Aberdeen-Asset

Call (02) 4926 2300 or email us here at

Leenane Templeton.

Speak to our financial planners to find out more about your investment options and the foundations of risk and return today.

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You have heard us talk about investment asset allocation or diversification, but we thought it might be a good idea to expand on that explanation to show you how it affects your investment portfolio.

You already know that asset allocation is spreading the money in your portfolio over a mix of the different investment types available, but what is the right mix and does “one size fit all?”

As with anything personal, your own financial portfolio must suit your specific needs – both now and in the future. So, with each of your objectives and timeframes in mind, the most important aspect to look at when determining your investment spread is risk.

There are three types of risk that must be considered:

1. General market risk – largely dependent upon economic conditions;
2. Market sector risk – a particular sector of the market, e.g. industrial vs resource stocks;
3. Specific risk – a particular share or property.

As you can see, each risk is affected by different factors, so the best way to manage all types of investment risk is to ensure that your portfolio is adequately diversified to cater for volatility and over-reactions. Put simply: when one goes down, another goes up.

Once the risk factors are taken into account, it’s time to look at the specific assets within the portfolio, investing across cash, fixed interest, Australian shares, international shares and property. All of which will provide something unique at the different points of the investment cycle.

Remember that the longer you plan to invest, the more important good diversification becomes. This further minimises risk and your growth potential is maximised.

We hope this explanation helps you to understand why we’re so focused on the right asset spread for you.

Call (02) 4926 2300 or email us.

If you have any questions about asset allocation or your personal portfolio, please contact our expert team of financial planners here at Leenane Templeton.

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A good financial planner is your best asset and the following information describes why having a good financial planner is important in uncertain economic times – or any time really.

Financial planning is about establishing a long-term strategy to secure your financial future with the lifestyle and living standards you desire. ‘Value’ often goes beyond dollars and cents. It can be the peace of mind and security that comes with being better prepared for the future. Once you've started a relationship with a good financial planner you will quickly see that they add value to your circumstances by helping you in a number of ways.

How can a good financial planner help better?

• Setting goals. This process helps you decide where you want to go in life. A skilled financial planner can assist you to identify your financial goals, prioritise them and understand the steps required to turn your vision into reality.
By knowing your financial goals and time frames, it’s easier to see where to concentrate your efforts. You'll also quickly spot the distractions that would otherwise blow you off course.
• Getting a financial plan started. Developing a written plan with a clear emphasis is critical to achieving your financial objectives. Your financial planner can also provide budgeting and debt management advice to help you start creating wealth without the costly anchor of “bad” debt. Protecting your future dreams with appropriate insurance is another key aspect your planner will manage.
• Maintaining a diversified portfolio. Every financial planner is required by law to take a client’s risk tolerance into account as part of their personalised financial plan. Diversification is another important tool for managing risk.
This means that the advice given and any investments recommended as part of that process are suited to your needs and risk level. And these will change to meet your circumstances as they vary throughout life.
• Being there over the long term. Going your own way is rarely the best option. Most people don’t have the background knowledge to feel confident about making investment decisions that will have a large bearing on their financial future. Keeping up with all of the legislative changes and new investment offers is also an onerous task. Your planner will be there to guide you on your path to financial independence and ensure your financial plan remains relevant and on track.

While investment magazines and subscription services can provide useful information, they are often written by journalists with a general grounding in financial concepts but who are not looking at the fuller picture. A good financial planner is trained to take into account all legislative and strategic implications to ensure you receive the best advice possible… and this training is ongoing.

Your financial plan is not a one-off, set-and-forget arrangement. Just as life has its many twists and turns your financial plan must be flexible and appropriate to your needs at any point in life.

If you would prefer to have a qualified, experienced and licensed financial planner work together with you on achieving your financial goals, give us a call.
Call (02) 49262300 or email us.

Disclaimer

A good financial planner is your best asset and we have our professional and qualified advisors at hand ready to assist you.

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