Aidan Geysen is a Senior Investment Strategist and Manager with Vanguard's Investment Strategy Group.
Aidan Geysen is a Senior Investment Strategist and Manager with Vanguard's Investment Strategy Group. In this role, Aidan is responsible for developing and delivering research insights into portfolio construction, exchange traded funds, and investment markets.
Prior to taking on his current role in May 2016, Aidan leveraged his experience in advice and research to manage relationships, and provide support and strategic direction to Vanguard's key institutional clients in Australia and New Zealand.
Before joining Vanguard in April 2015, Aidan spent 12 years with JANA Investment Advisers, Australia's largest asset consulting firm. Aidan's roles at JANA included the provision of investment advice to a diverse client base including industry and corporate super funds, university endowments, charitable foundations and family offices, and served as Chair of JANA's Research Committee, and Portfolio Manager of the multi-manager institutional Australian equities portfolios for JANA's Implemented Consulting clients.
Aidan holds a Bachelor Degree in Economics and Law from Swinburne University, and a Graduate Diploma in Applied Finance.
For those who are intending to start the New Year with a new investment portfolio or by establishing a self-managed superannuation fund – it's time to map out a plan of what to invest in.
There are in fact a number of highly individual considerations that go into this decision.
First and foremost you should define your end goal and how long you have to achieve it. This is the basic foundation of planning your investments and impacts a number of decisions to follow.
That's the easy part.
What comes next are the difficult, but all important decisions about what to invest in - your asset allocation and decisions around diversification are going to be key drivers of long term value in your portfolio, and importantly will set the right mix of risk and reward for you.
Diversification can be considered in two broad categories - asset class and investment style.
As investment market returns move up and down at different times, having broad exposure in your portfolio means that gains from one asset class can help offset those that, at some stage, inevitably generate losses. This is why concentrated share portfolios can be so unsuitable for many investors when viewed against their true appetite for risk.
Research by Vanguard's Investment Strategy Group shows that since 1980, globally significant market events such as corrections or bear markets have happened about every two years so diversifying across and within asset classes (shares, bonds, etc.) reduces exposure to risks associated with a particular region, company, sector, or segment.
Performance leadership is quick to change, and a diversified portfolio is less vulnerable to the impact of significant swings in performance by any one segment.
For example over the past 15 years, global equity markets have had 60 negative months, with global bonds posting a positive return in 73 per cent of those months. While some suggest the role of bonds as a diversifier is now compromised given the rising rate environment, equity / bond correlations have been around zero for the past two years which is similar to the average level of the past 15 years. This is during a two year period where we have seen bond yields rising and market volatility increasing.
Investments that are more concentrated or specialised - think REITs, commodities, or emerging markets - also tend to contribute more volatility to a portfolio when not sized appropriately.
This is why most investors are best served by significant allocations to investments that represent broad markets such as Australian and global equities, and Australian and global bonds – capturing diversification across sectors, industries, regions, and diversifying home country bias.
But diversification can also be considered in terms of investment strategy.
While the age-old debate continues to rage about whether indexing or active management rules the day, there is a more structured way to determine what’s best for your own portfolio in terms of investment style - one that leaves aside the old notion of a binary choice and instead offers investors the option of considering indexing as a key diversifier of active management risk.
Firstly work out what your expectations are for outperformance of an active investment, and then deduct management fees from this. This will leave you with a realistic expectation of how much you might expect to gain from outperformance.
Next consider what level of active risk you may be taking on in an active investment choice. Active risk is a measure of how far the fund deviates in terms of tracking error against a benchmark –knowing that no active manager will outperform the market all the time and allowing you to assess what level of variance you can tolerate (above or below benchmark performance).
In some cases, a higher allocation to active investments may be appropriate when three things align: expected outperformance outweighs management costs, you are comfortable with the level of risk being taken, and you believe you have the determination to stick with an active strategy through periods of underperformance.
How much diversification is enough?
The sky is really the limit on this – as long as you keep an eye on the costs associated with your investments and keep in mind that the ideal pieces in the diversification jigsaw are the ones that connect with your unique goals and timeframe.
This article originally appeared in the Australian Financial Review on 19 November, 2018.