Our Investment Philosophy

The InvestSMART Capped Fee Diversified Portfolio range invests in Exchange Traded Funds (ETFs) across a range of different asset classes including Australian shares, international shares, cash, fixed interest, property and infrastructure.

ETFs are great for managing risk, keeping costs low and providing a diversified portfolio.  

Our range of diversified portfolios focus on investing over several asset classes in different proportions to provide different risk vs. return profiles tailored to suit the requirements of all investors.

So, how do you know which portfolio to invest in?  

The core investment philosophy at InvestSMART focuses on the principles of diversification, low fees and investing for the long term. Exchange Traded Funds (ETFs), in comparison to unlisted managed funds, provide a cost-effective method to ascertain these goals. They also have liquidity benefits, being easier to buy and sell at short notice.

ETFs provide broad diversification by only needing to purchase a small number of securities. In contrast, when buying and holding hundreds of individual securities to achieve a similar level of diversification, greater costs are incurred in brokerage and fees – imagine the brokerage to buy 200 individual stocks!  

ETFs are also great for managing risk. When you invest in an ETF, you lessen individual company risk and sector risk. By holding a basket of individual stocks, you are not limiting your exposure to individual sectors of the market. 

In using ETFs, InvestSMART has the capacity to pass on these lower costs to the investor in the form of capped fees and low-cost investing. As fees compound over time, even a slight increase in fees can result in substantial differences to your return. 

You can read more on ETFs here.

We invest across a broad range of asset classes, as no one individual asset class is guaranteed to deliver substantial and consistent performance – once again it comes back to one of InvestSMART’s core principles of diversification.  

Full holdings for each portfolio can be found here, under Investment Preferences:

1. On the portfolio you are interested in, select 'learn more'
2. Scroll down to 'key facts'
3. Select the subheading called 'holdings'

From here, you will be able to see asset allocation by percentage, and also a comprehensive list of the holdings. 

How InvestSMART manages risk

Unfortunately, there is no way to completely avoid risk. As such, we opt to manage risk instead. The best way to mitigate risk and achieve better long-term risk-adjusted returns is through the process of diversification. 

We manage the portfolio's risk by maintaining and rebalancing the portfolios in line with the associated risk profile mandate. The risk profile mandate also corresponds with the recommended time frame.

Over time, with an adequately diversified portfolio, it is still possible to achieve an acceptable return. This is based on research by Nobel Prize-winning economist, Howard Markowitz, on the Modern Portfolio Theory. His theory demonstrates how you can combine numerous assets with different volatilities to minimise overall portfolio volatility.

When one portion of your portfolio is performing poorly, another is expected to be performing above average and balance out the negative effects of the asset lacking in performance.  

How investors can manage risk

Investors can manage risk by investing in a portfolio that is suitable to meet their goals and timeframe. Each of our portfolios has a mandate that explains the risk profile and suggested timeframe, which can be found here. 

Diversification in line with adhering to the investment timeframe significantly reduces the risk on your portfolio. 

InvestSMART offers a range of model portfolios that investors can choose from, which may fit their self-determined risk profile. There are a number of tools that can be used to get a better understanding of your risk profile.

Whilst we do not manage risk on a client-by-client basis, we do manage risk when selecting securities for these models.  

Diversification is all about managing risk. To put it simply, diversification means spreading your investment risk across a variety of assets and asset classes. This way, if one asset or asset class performs poorly, your other investments help to offset this poor performance, protecting your capital. The more uncorrelated assets and asset classes you invest in, the less risk you face of an underperforming asset damaging your overall return. This is where the use of ETFs comes into play - they provide a means to diversify across asset classes; and also are well-diversified within asset classes. 

Diversification can seem complicated to some investors – but this doesn’t have to be the case. There are currently lots of options available for investors who want to diversify but need a little bit of help in doing so. At InvestSMART we offer a range of already diversified portfolios that you can use to complement and diversify your existing investments or use as a total portfolio solution.   

Building a diversified investment can sound intimidating. However, the process isn’t as complex as it seems. To help you out, InvestSMART has developed a variety of tools and resources. Our Portfolio Manager allows you to track your assets and monitor your net wealth. You can also use the InvestSMART HealthCheck tool to help understand how well diversified your portfolio is, and whether your asset allocation is appropriate in achieving your desired financial objectives. 

Investing is a longer-term strategy to reach financial goals and investment timeframes are correlated directly with your risk profile. Your risk profile alludes to how much volatility you can handle as an investor.

Those with more conservative risk profiles seek less volatility and as such, someone with a higher risk tolerance is more willing and able to take on greater levels of volatility (or risk). It is important to bear in mind that your personal risk profile does not always correlate with your investment risk profile, but rather should correlate with your investment timeframe. 

For example, if you are saving to purchase an asset in the short term (within a year or two), such as nearing the end of a savings goal for a house deposit, you would have less time to experience volatility such as a drop in the market. Then, your investment timeframe is shortened, and you may accept a lower risk profile. 

The inverse holds true for those with a longer investment time frame, such as in the case of a long-term savings goal of purchasing a property, saving for retirement or other goals beyond the timespan of 5+ years.  A plethora of factors, including social, economic and political factors, all could impact the way the market moves; it is unpredictable in nature, and often even top fund managers aren’t able to predict the market. As such, we go back to the age-old saying time in the market > timing the market.

Research has consistently shown why timing the market doesn’t work (in the words of InvestSMART CEO, Ron Hodge) and concludes that those who are invested over the long-term in a well-diversified portfolio will generally perform better than those who attempt to predict when and where the market is going to move.  

However, timeframes are just a suggestion and it is ultimately your decision if you would like to withdraw funds before the time has elapsed. 

In this article, we'll explain how we handle portfolio rebalancing within our Investment PMA, including the importance of daily reviews and the various factors that may prompt a rebalance. We'll also touch upon our efforts to minimise transaction fees and the passive nature of our investment strategy.

Daily Review

We examine our model portfolios on a daily basis for several reasons:

• Deposit of funds: Ensuring that when investors deposit funds, their allocations align with the model portfolios.
• Withdrawal of funds: Adjusting the portfolio when investors withdraw funds to maintain the target allocation percentages.
• Dividends and distributions: Reinvesting any dividends or distributions received to keep the portfolio aligned with the model.
• Market moves: Monitoring market fluctuations that could cause holdings to drift from their target allocation percentages.

By conducting daily reviews, we can quickly respond to any changes and maintain the desired portfolio balance while keeping transaction fees in check.

Quarterly Investment Committee Meetings

Our our investment committee meets every quarter to review the portfolios and their benchmarks. If the benchmark has shifted significantly, the committee decides whether it's a short-term change or requires a long-term adjustment to allocations. As our mandate is to follow the benchmark, we generally adjust our portfolios accordingly.

Rebalancing

If necessary, we may rebalance the portfolios by selling or buying holdings to align them with the benchmark. This typically occurs once a quarter after the investment committee meeting. However, we are mindful of transaction fees, such as brokerage, and try not to rebalance too often to keep costs low for our investors.

Ad-hoc Rebalancing

In rare instances, we may introduce or remove a holding from a model, prompting an ad-hoc rebalance. Historically, this has happened no more than once or twice a year.

Adding/Removing Funds

Portfolios are also rebalanced whenever funds are added or removed.

New Holdings

We may introduce new holdings, such as a more suitable ETF, to maintain low costs for investors and enhance portfolio management.

Passive Investment Approach

It's important to note that our Investment PMAs are not actively managed. We don't try to predict or anticipate market moves. Instead, we follow a passive investment strategy, which means our portfolios track the market and accept the market return less any fees.

We hope this article clarifies our approach to portfolio rebalancing within the Investment PMA. By conducting daily reviews and making necessary adjustments, we aim to maintain an optimal balance in your investment portfolio while adhering to a passive investment strategy. If you have any further questions, please don't hesitate to reach out.

We understand it will happen, but it’s unpleasant when it does. So, here’s what to do when your account balance goes the wrong way.

Volatility

The securities markets are often associated with big swings in prices. For example, when the stock market rises and falls more than one per cent over a sustained period, it is called a “volatile” market. See Nuts and Bolts: What is Volatility.

Reasons behind volatility will vary, and seeing headlines detailing consecutive down days in markets and then seeing the flow-on effect on your investment portfolio tends to induce concern.

We invest knowing down days will occur, and it’s how we react to them that will determine your long-term investment success. Here’s how you and InvestSMART help to manage volatile times and keep your investments on track: 

1. Diversification is the key to lowering volatility over time. InvestSMART rebalances your portfolio from time to time, ensuring your portfolio maintains a blend of assets in line with the mandate of each portfolio. In short, we make sure a balanced portfolio remains balanced. It gives you confidence your portfolio blend and risk is in line with your expectations.
2. Make sure your investment portfolio is in line with your investment time horizon. The length of the timeframe directly correlates to the breakdown of growth and defensive assets each portfolio invests in. The longer the timeframe, the higher the growth assets and the greater the volatility. That timeframe allows for market downturns and provides time to recover. InvestSMART makes this easy for investors by clearly indicating the recommended timeframe for each portfolio.  
3. What you can do to help. Focus on your timeframe. You know downturns happen. It’s par for the course when it comes to investing. Stick to your timeframe, continue your regular contributions and add more funds if you can.

I’d recommend this excellent piece by my colleague John Addis on How to Worry Better for further reading.

Finally, we’re here to help. Use the chat function, email or call on 1300 880 160. We cannot provide personal/specific advice, but we can talk about investing generally and account management.

At InvestSMART, we’re all about making investing simple. We believe that everyone should have the confidence to control their financial future and it shouldn’t be hard or expensive to do so. Our mission is to help all Australian’s grow and protect their wealth. Whether you’re managing your own investments or looking for a little help, we deliver straightforward, flexible and affordable solutions to ensure you are better able to meet your investment goals. 

 The InvestSMART investment philosophy focuses on three key concepts: Lower fees, diversification and investing in a portfolio that aligns with your investment timeframe. 

S&P Indices versus Active (SPIVA) research finds that active managers underperform most benchmarks. This underperformance generally aligns with the average cost of management fees, which average around 1.2- 1.7% over time. This implies that higher fees do not necessarily correlate with improved performance - research has shown that it is often the inverse. 

Keeping this in mind, InvestSMART builds model portfolios using ETFs and with capped fees. The lower operating costs of ETFs translates into decreased expenses for investors. Fees on a portfolio may seem small, but compound over time and are the biggest detriment to long term performance. Evidence of this can be seen through the widening gap between the performance of InvestSMART portfolios and an average of peer funds. The effect of compounding year on year means it doesn’t take long for the small impact of fees to add up and make a meaningful difference.  

You can read more on our fees report and how fees can destroy your wealth here.  

We believe that by providing a range of model portfolios for clients across asset classes and with different diversified risk profiles, investors have the option of selecting a model that suits their investment objectives and timeframes. We recognise over the long term, no one asset class if guaranteed to deliver consistent returns. Instead, we offer solutions to build a diversified portfolio to minimise risk without sacrificing returns. Further, by using ETFs, diversification and capping our fees, we are able to remove obstacles commonly faced by investors, that would otherwise impair their ability to meet financial goals. Whilst there will always be risk associated with investing in equity markets, focusing on these three core components can lessen this risk. The performance of our diversified models indicates that this statement holds true.