InvestSMART

Diversified alternatives to fixed income and cash

If your need for stable, regular income means you can no longer cope with a real return of sub-1 percent, you seriously need to consider your next best alternatives to fixed income/cash.

By ·
25 Aug 2020 · 3 min read

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.


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