Despite market uncertainty, now is time to invest
Given the carnage experienced by the economy in the last six months, it's hardly surprising that many investors are behaving like deer in the headlights, not knowing which way to jump.
The threat of another uptick in the coronavirus and uncertainty over where markets are heading, has made Australians wary of investing in risk assets (like shares, property and bonds).
Adding to a lack of investor confidence, too few ASX-listed companies are willing to support their annual results this August with any guidance, good, bad or otherwise on future earnings. As a result, Australians continue to have mountains of cash, which while being risk-free, is struggling to earn 1 percent income in savings or term deposit accounts.
However, given the likelihood of lower-for-longer interest rates, investors risk the value of their cash going backwards. In light of this dilemma, it’s time to question whether the uncertainty or unevenness of any future economic growth, is a sufficient deterrent to deploying cash into growth assets now?
Diversification drives build-in defensiveness
The short answer is a resounding no: Regardless of how much you have to invest, you owe it to yourself to consider moving out of cash - beyond your short-term needs – and reaping the benefits of total returns from both income, and capital growth over time.
Admittedly, there’s no crystal ball to accurately predict future investment returns. But what smart investors understand is that sound investing principles outweigh futile attempts to time the market. One of these principles includes diversification, which is used to take the impossible task of accurately timing the market, off the table.
Nothing drives home the built-in defensiveness that diversification provides within uncertain market than share market performance during the COVID-led downturn. While the ASX lost around 8 percent during financial year 2020, all of InvestSMART’s four key ETF solutions fared considerably better. InvestSMART’s Conservative and Balanced Portfolios were down only -1.77 and -2.58 percent respectively.
Getting the right mix
It’s the built-in defensiveness provided through diversification, together with low costs that helps to de-risk all InvestSMART portfolios. By getting the right mix of growth and defensive assets classes, you can smooth out overall performance. For example, the underperformance experienced by growth assets in 2020, has been offset by better performing defensive assets classes. As a result, the risk of negative returns, and capital loss was significantly reduced.
Diversification also removes the need to jump in and out of markets when the going gets tough, which is not only costly, but potentially sidelines you from the market at the very moment it’s going up. Getting the right diversification of growth and defensive assets, depends on when you plan to achieve your financial goals. The shorter your investment time horizon, the more conservative (defensive) you’re diversification is going to be, and vice versa.
But whether you opt for InvestSMART’s conservative, balanced, growth or high growth portfolio, you can expect to receive total returns significantly higher than the yield off a single asset, and that’s especially true for cash and term deposits.
Low fees and compounding returns
As a low cost fund manager, with an expense ratio of 0.44 percent – compared with an industry average of 1.6 percent – and fees capped at $451 annually, InvestSMART maximises your savings. In addition to lower fees, InvestSMART portfolios also benefit from compounding returns, which add to your wealth by capturing the dividends in the cash component on the portfolio, and using it to buy more holdings when the portfolio is rebalanced.
Due to lower fees, plus the power of compounding returns, InvestSMART’s Conservative, Balanced and Growth portfolios have beaten 91%, 90%, and 87% of its peers respectively over the past five years.
Unsure of which InvestSMART Portfolio is right for you?
By clicking through to our Invest with us page, you’ll be able to match your investment time frame with the recommended time horizon of InvestSMART’s four diversified portfolios, so which one suits you best?