Investment portfolio asset allocation

This is one of the most agonising questions when it comes to investing, and the question which without a doubt presents the biggest of barrier to entry investing and source of self doubt; Investment portfolio asset allocation – what proportion should I structure my assets? Should I have more stocks than cash, or should I have bonds as well as cash? What about precious metals or other commodities? How do these assets behave and what is the optimum proportion to hold of each?

In this article I won’t be reinventing the wheel or suggesting anything crazy, but I will present you with;

  • Some of my thoughts on investing psychology and performance
  • What I think a sensible investment portfolio asset allocation looks like, and finally;
  • How I structure my personal investing portfolio.
Investment portfolio asset allocation
Portfolio asset allocation got you feeling a bit flat? No worries, read on and we will get you back up in the air in no time!

Opening thoughts on Investment portfolio asset allocation

The following is my ‘Shotgun’ of opening thoughts when it comes to investment portfolio asset allocation, based on my limited understanding of investor psychology and market performance. These are tidbits, quotes and gems I have come across during my financial education, and a few things I have expanded on or paraphrased as a quick brainstorm when I was asked to write this article by a reader…

  • High risk = high reward.
  • Shares are considered by the conventional financial industry as the riskiest asset class, but history has shown the most risky thing in the long term is actually not investing in them.
  • The more years you have to invest, the higher your risk tolerance should be.
  • The more streams of income you have, the higher your risk tolerance should be.
  • Diversification reduces your portfolio risk in a particular asset class, for example geographic diversification i.e. local vs international shares, and concentration risk within a particular asset class – i.e. consider an index tracking ETF which holds hundreds or thousands of companies vs one individual company share.
  • Non correlated asset classes tend to move or react differently to changes in economic conditions i.e. stocks vs bonds vs property vs commodities. Whether assets are correlated or not is up for debate!
  • Volatility on non-geared equities really means nothing over the long term where it averages out to zero, but can be gut wrenching in the short term.
  • Volatility on geared investments (such as leveraged ETFs) can destroy your investment capital very quickly, as the losses are magnified more than the gains due to loss crystallisation – I personally would never touch them!
  • Human emotion and poor self discipline can destroy a 100 year old investment portfolio in seconds, and drag its performance down into negatives very quickly. Volatility is usually the trigger, and fear the motivation!
  • Recognise that humans for whatever reason seem to be conditioned to hate loss more than they love gain. This results in a natural risk aversion.
  • Those who claim to be financial experts, are often not. If you get your financial advice from media such as TV breakfast channels, you probably need to turn the TV off! Don’t listen to the media since their job is to sell sensationalised and exaggerated headlines (clickbait!)
  • High fees erode your portfolios performance, and the majority of investors in actively managed funds under perform due to this factor in combination with human error in stock picking.
  • No one can predict a market crash, and no one can consistently pick stocks.
  • Those who are in the accumulation phase need a (small) emergency fund to cope with the ups and downs of life, but would do best to ensure the maximum of their money possible is invested in productive assets to counter the erosive effects of currency inflation.
  • Those who have retired or are in the draw down phase of life need a stable income to cover their cost of living, so need to hold a percentage of cash or fixed interest to smooth out volatility.
  • Past performance is not indicative of future performance; the markets might be efficient but they certainly aren’t rational! This is due to human emotion being at play – Fear and Greed

Sensible Investment Portfolio asset allocation;

Sensible investment portfolio asset allocation comes down to two key factors – are you in the accumulation or growing phase, or are you in the draw down or retirement phase?

The Key difference here is that your risk tolerance (and proportion of cash) will change as you progress from the accumulation to the draw down phase – logically, you will become more conservative, and need a higher percentage of cash as you get older and progress to the retirement phase.

Now, I will prefix with this discussion that whilst I am no means an expert when it comes to finance, I have picked up a thing or two during my few short trips around the sun. I truly believe that the MOST riskiest thing you can do when it comes to investing is not to invest. We all know that Fiat currencies are not stable and are not backed by any standard – they are trust currencies, controlled by the central banks and they are designed in such a way that they slowly inflate over time, losing their purchasing power.

This means in our modern fiat currency societies with central banks, if you are not investing, you are doomed to work forever. This means you will never be able to retire. If you do not invest, you will therefore have to rely on welfare to stay alive once you can no longer work. That is not a nice position to be in!

So the question remains, how do I set my portfolio up? What assets do I include and in what proportion? Well, its incredibly simple. The simplest, more surefire way to reach Financial Independence and to steadily grow your wealth is to invest into two key asset types: Business and Property. Of course, you will still need a small amount of cash (and fixed interest) to ‘cash-flow’ your lifestyle and keep the wheels in motion, but I make a clear distinction that you canot invest in cash or fixed interest, since this is simply currency – or rather, the absence of investing if you like!

As far as ‘all the rest’ go – its simply not worth your time and effort. Precious metals like gold and silver, commodities like barrels of oil, frozen orange juice concentrate, fine artwork, classic cars, vintage wine, antique furniture, jewellery, priceless Ming Vases, stamp collections… They do not put money back into your pocket, they do not cash flow. They only increase in value by proportion of what someone else is willing to pay you for them – otherwise known as the ‘greater fool principle’. I don’t understand these things properly, and I know there is significant cost overheads to store, protect and insure them. Accordingly, ‘investing’ in these types of things is not on my radar!

Furthermore, the concept of trading derivatives, futures, crypto or foreign exchange currencies is even more maddening to me. If there is one thing you take away from this, it is do not even consider it. If a financial adviser suggests to – run away from them as fast as you can, and make sure their hands are out of your wallet before you do!


We can invest in profitable business two ways: We can buy stocks, or we can start our own business. Starting your own business is a lot of work, can be gruelling, and statistically 9 out of 10 start ups fail. Still, if you are determined and willing to put in exorbitant amounts of effort, sweat, blood, tears and long hours, you can make it work and run a successful and profitable business. But if your like 99% of people and that sounds too hard and you would rather be a passive investor, you can simply buy a partial share in a business through the stock market.

Buying individual stocks is a mugs game imo, and by far the best strategy is to buy all of the stocks. Yes, all of the stocks. It is very simple and easy to do with the advent of ETFs, specifically a total stock market index ETF – these can give you instant diversification into all of the worlds biggest ‘blue chip’ companies for an ultra low management fee. For Example, just using the three Vanguard funds VAS (Australia), VTS (America) and VEU (Total world ex US) gives you instant ownership of thousands of publicly listed companies; practically this is the best outcome anyone could ever hope for.

You want the MAJORITY of your portfolio to be in stocks, regardless of your age. We are all investing for the long term here, and long term the riskiest thing is actually not owning businesses.


For some reason property is more of a religion than an asset class in Australia. There is good reason too – its a solid asset class and there are countless hundreds of thousands of Australian investors who have become financially independent by investing in property (there are also a lot who have become bankrupt, too!).

Property is an active investment, and is not as easy and passive as owning stocks. One might even think of property investing as a full time side hustle or even a personal business! Now property isn’t just property, and the three things you must learn about property when it comes to building your portfolio is of course;

  • Location
  • Location
  • Location

Seriously, as a novice property investor myself, when I came across from regional Australia into the big smoke of Sydney, I almost spat my coffee out when the realtor told me the 1 bedroom 1950s build pokey looking apartment I was looking at was worth over 10 times my yearly take-home wage. It is seriously insane, the hot property market in inner Sydney and Melbourne has fuelled ever increasing prices, and for the price of one bedroom apartment there you could actually buy an entire farm where I am from. It just seems crazy!

The absolute secret weapon when it comes to property investing is leverage. You can buy the asset using the banks money, and finance an interest only loan to help make the property cash flow positive. This in itself is a hedge against inflation, since your borrowing today’s dollars and paying them back with tomorrows dollars, which have inflated.

Anyway, the point of this is to raise awareness that there are only certain types of property that you should ever consider adding to your portfolio, so these are the four main rules I use to screen investment properties;

  • Must be cash flow positive – this usually requires good dividend yield
  • Must be within 15km of a CBD – this usually results in a good potential upside for capital growth
  • Interest only loan with a 80% LVR (20% cash deposit) – this reduces the risk of me defaulting
  • Ideally brand new property – this reduces maintenance cost and tenant vacancies, and also gives me a depreciation schedule to save on tax

Investment Portfolio asset allocation for the Accumulation phase

During the accumulation phase, it is assumed that you are earning more than you need to live, and rather sensibly stashing away the excess for the future and your retirement (whether that be conventional or FIRE).

You will need a small emergency fund to deal with lifes little ups and downs, so that you don’t leave yourself short if you can’t cover it from your income. This will prevent you from having to sell any of your assets, and deal with the associated headaches of potentially selling at a loss, sacrificing future compounding gains, and of course accounting and tax annoyances.

Personally, I keep a fairly small amount of ‘cash’ in my emergency savings – usually around $2000 – however this is because I have a fairly reliable source of income, and a very low cost of living. $2000 represents about one months living expenses, and has proven to be more than enough for my personal circumstances. If you had a less stable income such as self employed or a contract worker, you would likely need to have a larger emergency fund or ‘buffer’, I would suggest between 3 to 6 months of your living expenses which could be closer to or even more than $10,000!

Forms of cash and fixed interest include high interest savings accounts, term deposits with banks, Peer to Peer lending, or Money Market funds such as Bond ETFs. I personally keep my $2000 emergency fund split between an online High Interest Savings Account and Peer to Peer lending with Plenti, and avoid any term deposits or bonds because in my opinion that defeats the purpose of an emergency fund – I cant access them quickly or penalty free.

Because you are in the accumulation phase with strong income earning potential, you can afford to take on extra risk – so I personally take on geared investment properties. Your wage or income usually gives you the serviceability to support a couple of investment properties, but eventually the bank will ‘cut you off as you reach your max – it all depends on personal circumstance but for the usual punter its usually around $1M of debt or 3 to 4 properties.

To summarise: A sensible allocation for the accumulation phase might include between 1-4 cash flow positive (positively geared) investment properties that meet the sensible criteria, as much in ETF (or LIC) index funds as you get your hands on, and a small cash buffer or emergency fund in a high interest savings account or P2P lending platform to keep the wheels turning smoothly, the size of which depends on your personal circumstance such as family, cost of living and reliability of your wage.

Investment Portfolio asset allocation for the Draw down phase

So how long does your capital need to last you? Well, if your anything like the average retiree you are going to retire at 65, and probably live at least another 20 or 30 years. We all know of the Trinity study and the 4% withdrawal rule or safe withdrawal rate to know how much we need to have invested, but what about the proportion of stocks and bonds? What about if you are FIREing and retire at 30 – You might have another 65 years ahead of you! Does that change the portfolio allocation drastically?

The simple answer is No – it doesn’t really change. We want to continue investing in profitable business and real estate for the long term, and continue enjoying our reliable dividend and rental yields whilst experiencing good upside potential for capital growth. Depending on your personal circumstances and future plans for your portfolio, you begin slowly selling off chunks of your portfolio to fund your retirement at your chosen rate, but will however, want to increase the amount of cash you keep on hand to a more ‘comfortable’ level for your personal circumstance or ‘stress’ level.

Recent research and updates to the trinity study using Monte Carlo mathematical simulations confirms this. Using the most up to date data, they show that over time the addition of fixed interest such as cash, bonds or P2P lending to your portfolio lowers your success rate – i.e. increases the risk to your portfolio that you will run out of money before you die!

Investment portfolio asset allocation
Updated Monte Carlo simulation for the Trinity study for a 30 year period factoring in CPI [Source]

However, those who have retired or are in the draw down phase of life need a stable income to cover their cost of living, so they need to hold a percentage of cash or fixed interest to smooth out volatility. This cash or fixed interest causes a bit of portfolio drag, but it ensures they don’t have to sell shares at a big loss if the market drops sharply in a bear run – because they obviously still have bills to pay, and its likely dividends might be cut. As they draw down their cash reserves over a certain period the market ideally recovers and their dividend payments bounce back, and we are back to bull market conditions.

From the graph above you can see that over a 30 year period, there isn’t actually THAT much difference between a 100% stock and a 75% stock portfolio – Point of note here, the word ‘Stock’ could be thought of as being representational of ‘that which is not cash’. As you increase the time-frame the negative effects of ‘bonds’ becomes more apparent meaning for longer time-frames, you want as LITTLE fixed interest as possible – just enough to keep you feeling comfortable and satisfy your cash flow requirements.

Suggestions to get started working out what a sensible cash or fixed position is for you could be;

  • Your age divided by 5,
  • 10% of your investment portfolio, or;
  • One to Two years of your living expenses*

*This is the best option of them all, because this depends on your cost of living and therefore is the closest metric to what you might actually need!

Depending on your appetite for risk, most people in the retirement phase like to consolidate and remove debt, for example selling investment properties and taking the profits, paying off the mortgage completely, or simply paying down the mortgages to a level which makes you feel more comfortable. Whilst we know technically keeping an interest only loan forever and never paying off the debt is the smartest way from a business or purely monetary point of view to own property, this can be an unacceptable level of stress for a retiree. Investment properties are still a lot of work though, so maybe that should be psudo-retiree!

CaptainFI’s Investment Portfolio Asset Allocation

So How do I do it? Check out my Investing Strategy or Monthly Net Worth Updates to see exactly what I am doing and exactly what is in my portfolio right now. But I will give you a hint – I have very little fixed interest. To use a bit of a misleading finance lexicon I am ‘very aggressive’ because I own mostly Business and Property – both conventionally and also within my Superannuation.

Summary of Investment Portfolio Asset Allocation

I hope this article has reiterated the importance of investing smartly for the long term in profitable and productive assets like Businesses and positively geared property, and avoiding dumb speculative investments like gold, frozen orange juice concentrate or Ming Vases (or even worse, trying to day trade!). I also hope that you are aware of the serious drag penalty of holding too much cash, and how inflation destroys you when you do it. Of course, investing is a very personal thing and there is no one size fits all solution, so give it a go and find out what works best – Let me know in the comments what works for you!


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