Conservative portfolios

Curious on options for conservative portfolios where someone can't suffer potential sequence returns of a market crash and is limited to 30% or less equities.

What would be your options for the other 70%?

There are term deposits.
Bonds are another option of which Vanguard offers a few diversified options for 20 points.

What else can you look at?

 

LPTs are (were) considered defensive, not sure how their beta tracks with the rest of the market nowadays.

As commercial property cycles generally aren't correlated with movements in equities, capital gains in property are generally book valuations of ⅓ of the portfolio annually so a true position is not reflected but rather a partially-true position ie. rental income is correct but asset value can be under or over stated due to the timing of valuations

Income levels are generally stable however the investment analysis must consider the timing of market rent reviews, the terms of the rent reviews, WALE, refurbishment, lease incentives etc across the portfolio of assets in the LPT. Single tenant asset LPTs would have a higher degree of risk/risk profile compared to a multi-tenanted single asset (large distribution centre/warehouse vs shopping centre). Likewise the risks decrease the greater the number of assets in the portfolio.

 

If you can not suffer potential losses the only option is cash/ term deposits. Government bonds eg VGB are ok but returns are low. Corporate bonds carry risk. Property trusts can be a much higher risk than you think. Have a look at what happened to property trusts during the GFC. Calling @Nodrog, please come back!

 

Certainly add some diversification. I would place them in the growth part of the portfolio however.

That was my thoughts, wondering if I was missing anything.

 

I looked at this a while ago and wondered about bonds. If you do a search here about bonds you will find a @Nodrog post. He was one of a few who helped me see the light and I have stayed with TD for the part of my portfolio I might need over the next few years. Sorry, no fresh ideas

 

Like wise @Nodrog helped me with bonds i.e. no need to have them.
Where are you @Nodrog ??? We all miss you

 

I don’t know if there is anything else other than cash in bank that’s not exposed to sequence of return risks. Even bonds from what I understand could go backwards in value if interest rates rise.

So I would say stick to cash in high interest accounts / term deposits if you don’t want to be exposed to market risks.

 

I’m often torn between trying to keep activity happening on the forum vs being seen to stifle others views / create group mentality / being full of myself / verbal diarrhoea etc. Plus after thousands of posts some have just had a gutful of me posting. Hence why I try to refrain from posting at times to give others and their views some breathing space.

Back to topic Personally I prefer Term Deposits as opposed to Bond Funds as it gives me control of future known cast flows, there’s no fees and there won’t be any unexpected surprises. I use a Term Deposits platform which makes it a breeze to administer with all reporting provided:

Australian Money Market | Online term deposit platform

With SORR there are a multitude of ways to use TDs. The concept of a Bond Tent is popular so maybe search on that and simply substitute TDs (often referred to as CDs - Certificates of Deposit overseas) for Bonds.

Other than normal bonds there are also inflation protected Bonds (known as TIPs in US) but choice is limited in Australia and Interest return is also woeful. Within the Bond asset class obviously there are varying levels of risk. I personally would play it safe with Bonds and other so called “defensive” products rather than dialing up risk to chase returns which I prefer to leave to equities. That is the Portfolio is divided into risk free (or as near as possible) vs risk. When the **** hits the fan I don’t want any nasty surprises on the “risk free” side of the portfolio.

Then there’s fixed interest duration ie short vs medium vs long term. Risk and return generally increase with greater duration. I’m no expert on bonds however and have no desire to be one. It just doesn’t need to be difficult for most investors. Simple rules can apply.

So I suppose in my mind there’s not much else that I would be prepared to invest in for the defensive asset allocation in the portfolio. Note however that some consider their property loan offset account(s) in this category. I treat this as another Emergency source of funds.

This can be as simple as one wants or very complicated when venturing into the area of Sequence of Return Risk. There’s no correct answer as it varies depending on each individual’s risk tolerance and wealth. Then there’s optimal vs optimal for “each investor”. A source of much debate here at times.

But rather than turn this into a TDs vs Bonds debate those who aren’t fortunate enough to be able to live off the natural yield of the portfolio alone might appreciate the following approach that potentially provides the best of both worlds. The author / advisor is very much an indexer hence the use of a Bond Fund but understands the valuable role Term Deposits can play especially for retirees:

A better way to generate retirement income

 

Well the Vanguard conservative fund actually has a 70/30 split, so probably not a bad guideline for what you are trying to do.

30% equities (VAS, VGS, etc)
42% government bonds (VGB)
18% fixed interest (VAF)
10% cash

 

I can’t imagine there’s to many people on here who don’t enjoy your posts and find them very helpful. I personally would love for you to continue your regular posting on here unless of course you needed a break.

 

It's no wonder these types is portfolios get less coverage. The moving parts are much simpler.

I will add that I'm much more against active management in these types of portfolio. Active management risk and cost really strikes me as at odds with the portfolio purpose.

 

The irony of these Vanguard so called “passive” diversified funds is that every now and then Vanguard, based on their modelling / views, will change the composition / allocation %’s of these portfolios. For example the asset allocation of these portfolios now is very different to a couple of years ago. It will no doubt change again in the future, they make no secret of this. Hence there seems to be an “active” element with these funds depending on Vanguard’s view of the world at a point in time.

These diversified funds are potentially great from a behavioural perspective but what you sign up for now may be different to what you get down the track. I personally don’t like these sorts of surprises and the potential tax implications.

 

Great post and again showing your experience and wisdom.
I never came across the Australian Money Market for term deposits before, what a great resource to use for term deposits, appears to be no fees although they must get a commission of some sort from the financial institution that you select for your term deposit.
The article on "A better way to generate retirement income" although written with Canadians in mind can be applied to Australia quite easily. Its one of the best articles I have read about the Total Return Strategy and how to actually implement it.
Thanks Nodrog

 

Canadian articles can be useful for Australians as it has a lot of similarities to Australia re market size and makeup etc.

The author / advisor is widely known and highly regarded in the passive investing indexing community being a long term advocate of simple approaches. I’ve followed his site pretty much from when it first started. Similar with Vanguard Diehards then Bogleheads forums. Contrary to what some might think I’ve been a very long time reader about indexing / asset allocation but obviously the world’s slowest learner. Likely a behavioural thing, I love income but hate selling so chose not to implement much of what I read. Dividends ruled for my investing personality. Nothing to do, the cash just rolled in with no action required on my part which was just as well given some unforeseen events in our life where for long periods our investments were the furtherest thing from my mind.

Fortunately nowadays our wealth is such that we can enjoy the best of both worlds, take a more sensible and conservative approach with better asset allocation but still able to live off the natural yield of the portfolio.

For further education / ideas check out the Canadian Couch Potato site:

Your complete guide to index investing | Canadian Couch Potato

https://cdn.canadiancouchpotato.com/wp-content/uploads/2019/03/CCP-Model-Portfolios-ETFs-2018.pdf

And some Bond and Term Deposit articles for @Hodor (note GICS are same as our Term Deposits):

Tag: Bonds | Canadian Couch Potato

Tag: GICs | Canadian Couch Potato

Like all this stuff it may or may not be what one agrees with but there’s usually something of value to be found.

 

For @Hodor meant to add in my earlier post, based on worst historical market events some consider 50% of dividends from a well diversified index equity portfolio as a reasonably safe Bond proxy.

Surprising this is popular with a number of Boglehead retirees who follow Bill Bernstein’s Liability Matching retirement approach. That is the “safe” component of the portfolio can comprise Government Bonds (including inflation protected), Gov’t guaranteed Term Deposits / Cash and 50% of Equity Dividends.

Here’s the quote from Bernstein from discussion on Boglehead forum about his relevant book (“Ages of the Investor” from memory):

Some will find this disagreeable but Bernstein goes out on a limb here based on the worst period in US market history being the Great Depression.

Again one’s level of wealth and risk tolerance will play a great role in the choice of options available. If one is wealthy enough it can be 100% equities provided one can stomach it when markets crash.

We’re very equity heavy for retirees (“safe” dividends psychology perhaps) but given inflationary impact over time I think Index investor / advisor / author Rick Ferri might be near the mark in suggesting most investors should hold a minimum equity allocation of 30% then work upward from there based on one’s financial circumstances and risk tolerance.

 

I love this facility and use it in the SMSF where it reduces onerous amounts of paperwork generally needed for Term Deposits to next to nothing. One lot of paperwork to setup an account with AMM then that’s it. Generally I’ve found the interest rates as good as going direct. Incredibly simple to use. The government guarantee applies to all TD’s hence I limit each TD to $250K per ADI. Also reminders and checks in place so a TD doesn’t automatically get rolled over without your action.

Most SMSF software can receive a direct data feed from AMM.

 

I can only speak for myself, but I've never thought any of those things about you or even come close to having a gutful of you posting. If there's anything I don't like about your posts, it's that you're too modest. I've found your posts extremely valuable.

 

@Islay I use bonds in my portfolio, they can have their day in the sun as part of a portfolio

 

Let's stop calling them 'bond proxies' - Cuffelinks

 

Thanks for posting, interesting long winded article.
Brought up a thought that besides having VAS and VGS as core holdings for example, you could add Infrastructure, Property or other themed ETF's as satellites to add extra exposure if you felt inclined or believed in certain investing value tilt/s?
Just a thought?