Diversified alternatives to fixed income and cash
The trouble with saving through a single asset class, like fixed income/cash is you’re missing out on total returns derived from investing for both income (yield) and capital growth.
For example, a lump sum of $2000, plus $80 a month saved in cash since 2000, would have been worth $31,749 20 years later. By comparison, the same amounts invested in the ASX Accumulation Index over the same time frame, would have been worth $52,886.
Blend the assets, boost the return
Rather than being invested exclusively in either (capital guaranteed) fixed income/cash or riskier assets like shares, the better alternative is to look for a mix of both defensive and growth assets.
InvestSMART has four ETF portfolio solutions, each offering a different diversification of defensive and growth assets. But whichever one you choose – Conservative, Balanced, Growth or High Growth, each one will in varying degrees alter your scale of risk.
However, by getting the right blend of assets, much of this risk can be successfully offset. For example, of the 4.06 percent total return achieved by InvestSMART’s Conservative portfolio (65-70 percent invested in the safety of fixed income/cash) over three years, 1.11 percent came from capital growth, and 2.95 percent came from income respectively.
By comparison, InvestSMART’s High Growth Portfolio achieved total return over three years of 6.20 percent (2.67% capital growth & 3.53% income). But it required taking on proportionately greater risk (than the Conservative Portfolio), with the portfolio mix of growth and defensive assets representing 90 percent and 10 percent respectively.
Between the two extremes of Conservative and High Growth is InvestSMART’s Balanced Portfolio. While earning you a better return than cash – via capital growth and dividends derived from Australian shares, international shares and property – the Balanced Portfolio still maintains the safety of a large (45%) fixed interest/cash position.
Playing the long game
Like it or not, growth assets typically require more time in the market that yield-bearing fixed income/cash. For example, to deliver superior returns, InvestSMART’s High Growth portfolio has a seven year time horizon, compared with two years for InvestSMART’s Conservative Portfolio.
What typically separates Conservative Portfolio investors from their Growth Portfolio counterparts is their time horizon and appetite for losing money. Many investors’ favour short-term investments that deliver low returns, due to the fear of volatility associated with investing in shares or property. After all, markets go through cycles and rarely go up in a straight line, and there are times when investors’ might experience capital loss.
But despite this volatility, over time growth assets (like shares and property) have historically delivered better outcomes than low-risk, low-growth defensive assets like fixed income/cash. For example, Vanguard data reveals that $10,000 invested in Australian shares in 1989, would have delivered annual returns of 9.4 percent over 20 years. By comparison, cash over the same period delivered an annual return of 5.6 percent.
The beauty of a diversified InvestSMART ETF portfolio is its built-in defensiveness. Rather than have your nest-egg in fixed income/cash, you can use a basket of diversified growth and defensive asset classes to smooth out your overall performance, and de-risk your portfolio when markets fall.
Portfolio overview
Portfolio |
Growth V Defensive ratio |
Time horizon |
Risk tolerance |
Total return over three years |
High growth |
90/10 |
7-plus |
High |
6.20% |
Growth |
70/30 |
5-plus |
High |
5.86% |
Balanced |
50/50 |
4-plus |
Med/High |
4.95% |
Conservative |
30/70 |
2-plus |
Low/med |
4.06% |
* Investment management fees start at just $99 p.a and are capped at $451 p.a. for total investments over $82,000.
Frequently Asked Questions about this Article…
Diversifying beyond fixed income and cash can enhance your total returns by combining income (yield) and capital growth. For instance, investing in a diversified portfolio like the ASX Accumulation Index could have significantly outperformed cash savings over a 20-year period.
InvestSMART's diversified ETF portfolios offer a mix of defensive and growth assets, which can help offset risks and smooth out performance. This approach can provide better returns compared to sticking solely with fixed income or cash.
InvestSMART's Conservative Portfolio focuses more on fixed income/cash, offering lower risk and a 4.06% return over three years. In contrast, the High Growth Portfolio takes on more risk with a higher allocation to growth assets, achieving a 6.20% return over the same period.
The High Growth Portfolio from InvestSMART is designed for a long-term investment horizon of seven years or more, allowing time for growth assets to potentially deliver superior returns despite market volatility.
InvestSMART's Balanced Portfolio maintains a 50/50 mix of growth and defensive assets, providing a balance between potential returns and risk. It includes a significant portion of fixed income/cash to help manage volatility.
InvestSMART's investment management fees start at $99 per annum and are capped at $451 per annum for total investments over $82,000, making it a cost-effective option for managing diversified portfolios.
Growth assets like shares and property typically experience more volatility but have historically delivered better long-term returns. A longer time horizon allows these assets to recover from market fluctuations and capitalize on growth opportunities.
A diversified portfolio, like those offered by InvestSMART, includes a mix of growth and defensive assets. This diversification helps de-risk your portfolio and smooth out performance, providing a buffer against market downturns.