Investing is one tough business! In fact investing is often described as a zero-sum game: one investor's profit is another investor's loss. The historic upward growth of the stock market certainly put long-term investors in pole position to experience a "positive-sum game", however achieving long-term gains and outperforming the market is no easy task.
One of the many hurdles that investors must navigate is portfolio construction. Often, particularly when one is new to investing, there is an unfortunate habit of betting too big on risky stocks that have binary outcomes. Sometimes these work out well and result in a big profit which encourages further risk taking, other times it results in a big loss which leads to a complete avoidance of the stock market for ever more!
There are lots of different ways to construct a portfolio with some more suitable for experienced investors, other strategies however are more generalised. One strategy that looks sensible and that could reasonably be followed by most investors is the asset allocation of the Future Fund.
The Future Fund is Australia's Sovereign Wealth Fund. It was established to benefit future generations of Australians and was originally seeded with a 17.1% stake in Telstra Corporation Ltd (ASX: TLS).
Here's the breakdown of the Future Fund's portfolio structure as at the 31 December 2014:
- Australian equities: 8.8% ($9.6 billion)
- Global equities – developed markets: 20.9% ($22.8 billion)
- Global equities – emerging markets: 9.4% ($10.3 billion)
- Private equity: 9.5% ($10.4 billion)
- Property: 6.3% ($6.9 billion)
- Infrastructure and Timberland: 7.4% ($8 billion)
- Debt securities: 10.8% ($11.8 billion)
- Alternative assets: 14% ($15.3 billion)
- Cash: 12.8% ($14 billion)
While certain assets such as Private Equity are not so easily copied by individual investors, most of the allocations could be reasonably well mirrored.
For example, Westfield Corp Ltd (ASX: WDC) could provide investors with exposure to a diversified global property portfolio, Sydney Airport Holdings Ltd (ASX: SYD) offers investors exposure to a high quality infrastructure asset, while Platinum Capital Limited (ASX: PMC) is a listed investment company that owns a portfolio of global equities.
