Capital Allocator

A balanced 60/40 portfolio is a sensible starting point for most investors: 60% equities (split between Australian and international), 40% bonds/cash. Adjust based on your risk tolerance and time horizon. Younger investors can go higher equity; approaching retirement, more conservative.

A reasonable range is 40-60% domestic, 40-60% international within your equity allocation. Some home bias is justified for franking credits and currency matching. Avoid extremes - neither 100% domestic nor 100% international is optimal.

Bonds are optional if you have very long time horizon (30+ years) and high risk tolerance. However, some bonds reduce volatility and provide dry powder for rebalancing. Even 10-20% bonds can help you stay the course during equity crashes.

Strategic allocation should rarely change - only on major life events (marriage, children, approaching retirement) or significant changes in risk tolerance. Rebalance to your targets quarterly or annually, but do not change the targets frequently.

Mixed views exist. Unhedged provides diversification - AUD may fall when Australian equities fall, cushioning losses. Hedged reduces volatility. A 50/50 approach (half hedged, half unhedged) is reasonable. Long-term, currency impact often washes out.

View your total wealth as one portfolio. Add super allocation to personal accounts for total picture. A common approach: aggressive in super (tax-advantaged growth) and more conservative personally. Ensure total combined allocation matches your objectives.

If you own your home, you already have significant property exposure. Additional listed property (REITs via VAP) is optional. For renters or those wanting more property exposure, 5-15% allocation is reasonable. Property provides income and some inflation hedge.

Hold tax-inefficient assets (bonds, high-yield international) in super where tax is 15% or 0%. Hold tax-efficient assets (Australian equities with franking) in personal accounts to use franking credits. This can add 0.3-0.5% annually after-tax.

Without leverage, risk parity results in lower expected return but smoother ride. A rough approximation: 25% equities, 75% bonds achieves roughly equal risk contribution. Accept lower returns for lower volatility. With leverage on bonds, can target similar total risk to 60/40.

Value, momentum, quality, and low volatility have strongest historical evidence. Diversify across factors rather than concentrating in one. Factor premiums are variable - they may underperform for years. Small consistent tilts are more robust than large factor bets.

Estimate annual spending needs. Bucket 1: 3 years expenses in cash/short bonds. Bucket 2: years 4-10 in intermediate bonds. Bucket 3: remainder in equities for long-term growth. Refill Bucket 1 from equity gains. This provides psychological security and liquidity.

Some evidence supports reducing equity in high-volatility regimes. Simple rules (reduce when A-VIX > 25) can help avoid worst drawdowns. However, timing is imperfect and may cause missing rebounds. If implementing, use simple rules and accept imperfection.