2008 was a difficult year for growth assets such as property and equities (both domestic and global). It was however, a great year for government bonds, cash & managed futures. Before you allocate 100% of your portfolio to cash, it is prudent to remember that it has only outperformed all other asset classes once in the past 29 years.

Rebalancing from your positively performing assets and re-allocating to property and equities will pay dividends in the mid to long term. This worked at the beginning of 2008 if you sold down some of your equity and property exposure and topped up your previously underperforming bond and cash holdings.

An allocation to long/short or managed future investments have the ability to make money in rising, falling and flat markets. A small allocation to these strategies can help you diversify your portfolio beyond the standard investment opportunities and can add to your returns.

Mortgage funds offering yields significantly higher than cash were marketed as being secure. Generally, the higher the return, the higher the risk. As time has shown, these investments had significantly higher risk and the return being offered did not adequately compensate you for this.

Borrowing money to invest can significantly increase your returns. It can also wipe you out. Conservatively structured, unlisted warrants have been amongst the best performing geared investment as interest rates have dropped below dividend yields. Bond and call structures have also performed well on a relative basis.

Retaining a portion of your portfolio in cash, (NW Advice advocates at least 3 years living expenses if you are retired), allows you to sit out gyrations in share markets and potentially avoids selling down your investments at the bottom of an investment cycle. It also avoids the reliance on investments which had liquidity issues in 2008. It also provides capacity to participate in capital raisings which can yield significant short term profits.

It is important to constantly assess the merits of every investment within your portfolio. 2008 is littered with corporate failures which were share market darlings: Babcock & Brown, Centro, Zinifex et al. By crystallising the great gains that these investments once offered, you can re-allocate your capital to better opportunities.

Avoid your natural ‘herd’ instincts. Focus on fundamentals and eliminate emotion when investing. Very few picked the top of the share market and even fewer will predict the bottom. Waiting for the market to bounce before you feel comfortable will satisfy your herding instincts but will reduce your returns over the long run.

All views expressed within this article are NW Advice Pty Limited’s.

Disclaimer: The advice provided in this article is general in nature and it does not take into account your needs, objectives or financial situation. You should always take these matters into consideration before making an investment decision.

NW Advice is an independently operated, non-aligned financial planning practice offering fee for service advice. Any opinion and recommendation within this newsletter by NW Advice are independent of our own views and should not in any way be construed as personal advice.