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What constitutes a diversified investment portfolio?


As SMSF investors have unique investment needs, the mix of assets they hold in their investment portfolio will determine whether these needs are met.

Each SMSF investor has their own unique investment needs, and the mix of assets they hold in their investment portfolio will be one of the key determinants in delivering to those needs. Generally speaking, balanced portfolios have a 70% allocation to growth assets and a 30% allocation to defensive assets. Examples of what constitutes growth and defensive assets, and the role they play in the overall portfolio, are provided below.

Growth

  • Shares (55%) – (or equities) offer strong growth potential. When an investor buys a share, they become a part owner or ‘shareholder’ of the company.
  • Real estate (8.0%) – this is a physical ‘bricks and mortar’ investment which provides the potential for capital growth and income. The income is driven by rents that are paid by tenants under contractually binding leases.
  • Infrastructure (3.0%) – these assets can offer investors stable inflation-linked cash flows and capital growth potential. They represent the opportunity to access the utilities and facilities that provide essential services for economic growth.

Defensive

  • Cash (5.0%) – these investments (such as bank bills) have a relatively short investment time frame and can provide low-risk income in the form of regular interest payments.
  • Bonds (22%) – bonds are a debt instrument where funds are loaned to an entity (corporate or government) for a defined period of time at a fixed interest rate. Bonds focus on providing capital protection and income.

Growth and defensive

  • Alternatives (7% - growth 4%, defensive 3%) – alternative investments encompass a wide variety of investment opportunities that fall outside the mainstream areas of shares, fixed income and real estate. Examples include commodities, private equity, hedge funds, venture capital and mortgage-backed securities. The risk and return profile will vary across different alternative assets.

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