Review risk and sleep soundly
With the ASX 200 major share index increasing 13 per cent and the US S&P 500 index 21 per cent higher in Australian dollar terms, share investors including our major superannuation funds have fared well in the financial year just ended.
This follows a sterling performance in the previous financial year and so far, despite the trade war clouds on the horizon, share owners have been amply rewarded for the higher risks involved in owning shares.
This means that yield-seeking investors still have a strong incentive to retain or even increase their equity investments while returns from cash and fixed interest investments are at historic lows. However, there are many traps for the unwary including that share prices can be highly volatile.
This year's good sharemarket performance resulted from the very strong performance of a small number of leading companies compensating for the poor performance of other companies included in the relevant indexes. In Australia, the major resource stocks including the mining and energy sectors and low yielding leaders such as CSL had an outstanding year.
Despite their high fully franked dividend yields, banks performed poorly for various reasons. As a result, returns were not as good for so-called value investors concentrating on high dividend yields. Indeed, the past year provides a timely warning about concentrating portfolios on a limited number of companies to boost annual income.
No matter how attractive an individual investment may appear, the benefits of diversifying portfolios to reduce risks are many, not the least being able to sleep at night. For superannuation and pension funds subject to no or low capital gains tax, returns equivalent to sound regular income streams can be generated by owning lower dividend paying shares that generate capital gains.
The capital gains can be realised as and when needed and if companies become overvalued the weightings can be altered. While predicting outcomes in this new financial year is difficult, pundits largely agree our major banks will continue to face problems while the prospects of last year's best performers appear bright.
A key ingredient in successful investing is to choose an asset allocation consistent with the investor's risk profile and ability to sit out downturns. Given how strongly sharemarkets have performed in the past two years, this is an appropriate time to review exposure to shares and even consider taking profits or diversifying holdings to reduce risk.