We will go through the numbers of how your investment portfolio would look over the period 1926 to 2016 with various ratios across stocks and bonds. This will show the importance of having a diversified portfolio to minimise risk.
Different ratios will suit different people depending on many factors such as age, risk appetite and what your goals for retirement are.
The 100% allocation in stocks shows strong annual growth, but a whopping 25 years of losses. If you are getting into the investment game at a young age, you could consider this approach as you have a greater amount of time to ride out the bad years.
If you are older, you have much less time to bring the numbers back into the green so you are likely to end up at a loss overall. You are better to diversify your portfolio with more bonds and other options such as Term Deposits where you get paid a guaranteed amount.
Remember asset allocation. Have stocks in a broad range of industry sectors, or make use of low-cost index funds like those offered by Vanguard and Blackrock which capture stocks from all different sectors.
Another way to diversify your portfolio beyond just stocks and bonds is using annuity offerings.
Positives of annuities
- You aren’t liable to pay tax on the investment earnings
- If you purchase annuities using funds from your superannuation, they are tax-free from 60 years old
- You receive a guaranteed income
Negatives of annuities
- You have no say in how the money is invested
- You can’t take out money in a lump sum, as it’s paid out to you gradually like a salary
- Depending on how the markets perform, you may be paid out less than using other investment strategies
Numbers sourced from Vanguard