InvestSMART

Our Investment Philosophy

The InvestSMART Capped Fee Diversified Portfolio range invests in Exchange Traded Funds (ETFs) across a range of different asset classes including Australian shares, international shares, cash, fixed interest, property and infrastructure.

ETFs are great for managing risk, keeping costs low and providing a diversified portfolio.  

Our range of diversified portfolios focus on investing over several asset classes in different proportions to provide different risk vs. return profiles tailored to suit the requirements of all investors.

So, how do you know which portfolio to invest in?  

The core investment philosophy at InvestSMART focuses on the principles of diversification, low fees and investing for the long term. Exchange Traded Funds (ETFs), in comparison to unlisted managed funds, provide a cost-effective method to ascertain these goals. They also have liquidity benefits, being easier to buy and sell at short notice.

ETFs provide broad diversification by only needing to purchase a small number of securities. In contrast, when buying and holding hundreds of individual securities to achieve a similar level of diversification, greater costs are incurred in brokerage and fees – imagine the brokerage to buy 200 individual stocks!  

ETFs are also great for managing risk. When you invest in an ETF, you lessen individual company risk and sector risk. By holding a basket of individual stocks, you are not limiting your exposure to individual sectors of the market. 

In using ETFs, InvestSMART has the capacity to pass on these lower costs to the investor in the form of capped fees and low-cost investing. As fees compound over time, even a slight increase in fees can result in substantial differences to your return. 

You can read more on ETFs here.

We invest across a broad range of asset classes, as no one individual asset class is guaranteed to deliver substantial and consistent performance – once again it comes back to one of InvestSMART’s core principles of diversification.  

Cash 

 Provides protection against the volatility of markets in times of market downturns. Why is there cash listed in my portfolio? 

Bonds 

As a defensive asset, bonds provide a consistent income. They are less volatile in comparison to equities. 

Domestic Equities 

Delivers strong returns over the long term, even when considering exposure to global and domestic downturn. Share value often fluctuates in the short term. 

International equities 

Australian shares make up a mere 2% of the globes total market capitalisation. International equities provide access to potential returns in sectors that are underweighted in the Australian equity market (such as technology) and additional diversification benefits.  

Property & Infrastructure 

Provides growth in line with inflation, or real income growth and is less volatile in comparison to equities. 

Full holdings for each portfolio can be found here, under Investment Preferences:

  1. On the portfolio you are interested in, select 'learn more'
  2. Scroll down to 'key facts'
  3. Select the subheading called 'holdings'

From here, you will be able to see asset allocation by percentage, and also a comprehensive list of the holdings. 

How InvestSMART manages risk

Unfortunately, there is no way to completely avoid risk. As such, we opt to manage risk instead. The best way to mitigate risk and achieve better long-term risk-adjusted returns is through the process of diversification

We manage the portfolio's risk by maintaining and rebalancing the portfolios in line with the associated risk profile mandate. The risk profile mandate also corresponds with the recommended time frame.

Over time, with an adequately diversified portfolio, it is still possible to achieve an acceptable return. This is based on research by Nobel Prize-winning economist, Howard Markowitz, on the Modern Portfolio Theory. His theory demonstrates how you can combine numerous assets with different volatilities to minimise overall portfolio volatility.

When one portion of your portfolio is performing poorly, another is expected to be performing above average and balance out the negative effects of the asset lacking in performance.  

How investors can manage risk

Investors can manage risk by investing in a portfolio that is suitable to meet their goals and timeframe. Each of our portfolios has a mandate that explains the risk profile and suggested timeframe, which can be found here

Diversification in line with adhering to the investment timeframe significantly reduces the risk on your portfolio. 

InvestSMART offers a range of model portfolios that investors can choose from, which may fit their self-determined risk profile. There are a number of tools that can be used to get a better understanding of your risk profile.

Whilst we do not manage risk on a client-by-client basis, we do manage risk when selecting securities for these models.  

Diversification is all about managing risk. To put it simply, diversification means spreading your investment risk across a variety of assets and asset classes. This way, if one asset or asset class performs poorly, your other investments help to offset this poor performance, protecting your capital. The more uncorrelated assets and asset classes you invest in, the less risk you face of an underperforming asset damaging your overall return. This is where the use of ETFs comes into play - they provide a means to diversify across asset classes; and also are well-diversified within asset classes. 

Diversification can seem complicated to some investors – but this doesn’t have to be the case. There are currently lots of options available for investors who want to diversify but need a little bit of help in doing so. At InvestSMART we offer a range of already diversified portfolios that you can use to complement and diversify your existing investments or use as a total portfolio solution.   

Building a diversified investment can sound intimidating. However, the process isn’t as complex as it seems. To help you out, InvestSMART has developed a variety of tools and resources. Our Portfolio Manager allows you to track your assets and monitor your net wealth. You can also use the InvestSMART HealthCheck tool to help understand how well diversified your portfolio is, and whether your asset allocation is appropriate in achieving your desired financial objectives. 

 

Investing is a longer-term strategy to reach financial goals and investment timeframes are correlated directly with your risk profile. Your risk profile alludes to how much volatility you can handle as an investor.

Those with more conservative risk profiles seek less volatility and as such, someone with a higher risk tolerance is more willing and able to take on greater levels of volatility (or risk). It is important to bear in mind that your personal risk profile does not always correlate with your investment risk profile, but rather should correlate with your investment timeframe. 

For example, if you are saving to purchase an asset in the short term (within a year or two), such as nearing the end of a savings goal for a house deposit, you would have less time to experience volatility such as a drop in the market. Then, your investment timeframe is shortened, and you may accept a lower risk profile. 

The inverse holds true for those with a longer investment time frame, such as in the case of a long-term savings goal of purchasing a property, saving for retirement or other goals beyond the timespan of 5+ years.  A plethora of factors, including social, economic and political factors, all could impact the way the market moves; it is unpredictable in nature, and often even top fund managers aren’t able to predict the market. As such, we go back to the age-old saying time in the market > timing the market.

Research has consistently shown why timing the market doesn’t work (in the words of InvestSMART CEO, Ron Hodge) and concludes that those who are invested over the long-term in a well-diversified portfolio will generally perform better than those who attempt to predict when and where the market is going to move.  

However, timeframes are just a suggestion and it is ultimately your decision if you would like to withdraw funds before the time has elapsed. 

We review our model portfolios on a daily basis. In addition to this, our investment committee formally meets every quarter to review the models and decide if a rebalance is required. For instance, once a quarter we may need to re-weight the allocations to the benchmark. This may involve selling or buying holdings to bring your portfolio(s) into line with the benchmark.

On the rare occasion, we may rebalance ad hoc in an instance where we have elected to introduce or remove a holding from a model. Historically speaking, this has only occurred a maximum of once or twice in a year. More commonly, portfolios are also rebalanced whenever funds are added or removed from a portfolio.  

New holdings may be introduced where a new ETF becomes available that better serves our portfolio management purposes. This circles back to maintaining low costs for investors by seeking lower costs and spreads. 

We understand it will happen, but it’s unpleasant when it does. So, here’s what to do when your account balance goes the wrong way.

Volatility

The securities markets are often associated with big swings in prices. For example, when the stock market rises and falls more than one per cent over a sustained period, it is called a “volatile” market. See Nuts and Bolts: What is Volatility.

Reasons behind volatility will vary, and seeing headlines detailing consecutive down days in markets and then seeing the flow-on effect on your investment portfolio tends to induce concern.

We invest knowing down days will occur, and it’s how we react to them that will determine your long-term investment success. Here’s how you and InvestSMART help manages volatile times and keep your investments on track: 

  1. Diversification is the key to lowering volatility over time. InvestSMART rebalances your portfolio from time to time, ensuring your portfolio maintains a blend of assets in line with the mandate of each portfolio. In short, we make sure a balanced portfolio remains balanced. It gives you confidence your portfolio blend and risk is in line with your expectations.
  2. Make sure your investment portfolio is in line with your investment time horizon. The length of the timeframe directly correlates to the breakdown of growth and defensive assets each portfolio invests in. The longer the timeframe, the higher the growth assets and the greater the volatility. That timeframe allows for market downturns and provides time to recover. InvestSMART makes this easy for investors by clearly indicating the recommended timeframe for each portfolio.  
  3. What you can do to help Focus on your timeframe. You know downturns happen. It’s par for the course when it comes to investing. Stick to your timeframe, continue your regular contributions and add more funds if you can.

I’d recommend this excellent piece by my colleague John Addis on How to Worry Better for further reading.

Finally, we’re here to help. Use the chat function, email or call on 1300 880 160. We cannot provide personal/specific advice, but we can talk about investing generally and account management.

At InvestSMART, we’re all about making investing simple. We believe that everyone should have the confidence to control their financial future and it shouldn’t be hard or expensive to do so. Our mission is to help all Australian’s grow and protect their wealth. Whether you’re managing your own investments or looking for a little help, we deliver straightforward, flexible and affordable solutions to ensure you are better able to meet your investment goals. 

 The InvestSMART investment philosophy focuses on three key concepts: Lower fees, diversification and investing in a portfolio that aligns with your investment timeframe

S&P Indices versus Active (SPIVA) research finds that active managers underperform most benchmarks. This underperformance generally aligns with the average cost of management fees, which average around 1.2- 1.7% over time. This implies that higher fees do not necessarily correlate with improved performance - research has shown that it is often the inverse. 

Keeping this in mind, InvestSMART builds model portfolios using ETFs and with capped fees. The lower operating costs of ETFs translates into decreased expenses for investors. Fees on a portfolio may seem small, but compound over time and are the biggest detriment to long term performance. Evidence of this can be seen through the widening gap between the performance of InvestSMART portfolios and an average of peer funds. The effect of compounding year on year means it doesn’t take long for the small impact of fees to add up and make a meaningful difference.  

You can read more on our fees report and how fees can destroy your wealth here.  

We believe that by providing a range of model portfolios for clients across asset classes and with different diversified risk profiles, investors have the option of selecting a model that suits their investment objectives and timeframes. We recognise over the long term, no one asset class if guaranteed to deliver consistent returns. Instead, we offer solutions to build a diversified portfolio to minimise risk without sacrificing returns. Further, by using ETFs, diversification and capping our fees, we are able to remove obstacles commonly faced by investors, that would otherwise impair their ability to meet financial goals. Whilst there will always be risk associated with investing in equity markets, focusing on these three core components can lessen this risk. The performance of our diversified models indicates that this statement holds true.

Related topics

When you BPAY your funds before 6 pm on a business day, they will typically arrive in our PMA Trust Account the following business day.

We will email you that we have received your partial or total funds, depending on the amount you have sent.

Once we have received the total funds for investment, we will then send your funds to the share brokerage account opened in your name. This transfer typically takes overnight as well.

When your funds arrive at the share broker the next business day, we will begin to purchase holdings in line with your chosen portfolio.

Once the shares/ETFs have settled (T+2), we will enable the online platform for you to view and administer your holdings. We will send you a welcome email explaining how to access the online platform.

This process takes about 4-5 business days from when we receive your total funds.

Why does it take 4-5 business days and not immediately?

We're proud to offer low and capped management fees for our InvestSMART investment products. At the heart of everything we do, our purpose is to make investing rewarding, accessible and affordable.

To keep fees low and capped, we take a process-driven approach. For instance, our trading team can keep costs down by trading once a day during a specific period. This means that funds received are actioned the following business day.

Settlement periods

As with any ASX listed share or ETF, there is a two business days settlement period. The ASX explains this here. This settlement period means your holdings won't settle until two days after the transaction takes place.

Your investments are held in a CHESS sponsored brokerage account. This adds an extra layer of protection and can offer more tax advantages as you can transfer holdings to your share trading account and not be forced to sell them. However, this means that getting funds from your bank account to the brokerage bank account adds an extra step. We are in the process of investigating CMA accounts to improve this.

Withdrawals typically take 4-5 business days from the day you verified the withdrawal request.

Because of the delay with data reflected in the My Account section, you may see your cash component in your PMA larger than usual.

This increased cash holding is temporary and shows that the cash has been 'freed up' and will shortly be sent to your nominated bank account.

Why does it take 4-5 business days and not immediately?

We're proud to offer low and capped management fees for our InvestSMART investment products. At the heart of everything we do, our purpose is to make investing rewarding, accessible and affordable.

To keep fees low and capped, we take a process-driven approach. For instance, our trading team can keep costs down by trading once a day during a specific period. This means that withdrawal requests that are verified and submitted are actioned the following business day.

Settlement periods

As with any ASX listed share or ETF, there is a two business days settlement period. The ASX explains this here. This settlement period means your funds won't be available until two days after the transaction takes place.

Your investments are held in a CHESS sponsored brokerage account. This adds an extra layer of protection and can offer more tax advantages as you can transfer holdings to your share trading account and not be forced to sell them. However, this means that getting funds from your brokerage bank account to the InvestSMART bank account adds an extra step. We are in the process of investigating CMA accounts to improve this.

What can I do to help?

Please be aware of the four to five day withdrawal period and factor in potential public holidays that may extend the process.