Portfolio Construction at a Micro Level

In formulating investment portfolios for clients, I focus on three key elements.

Firstly, I must be confident the investment is safe. By that I mean I look for investments I am confident will withstand the normal ups and downs and stresses of modern investment markets and that they will survive whatever might be around the corner.

All you need do is think back to the Global Financial Crisis of 2007-2009 or to a lesser degree to the early days of the Pandemic in 2000, to understand what I am referring to regarding the stresses of modern investment markets.

While we cannot know when the next downturn in the market will occur or how great it will be, we can be sure another downturn is coming, and I need to make sure any investment I recommend will withstand whatever may come our way.

Secondly, I look for investments that generate a significant income stream. Ideally, I am looking for investments that pay dividends and ideally fully franked dividends and I do this for a reason.

Retirement is all about generating as much income as I can for clients as safely as I can. Too often clients are tempted by what they think are high yielding investments only to find that they are investing in high-risk ventures.

By looking for well managed companies that have a proven track record of paying strong incomes streams I minimize this risk. By looking for companies paying fully franked dividends I know I am taking advantage of a generous tax situation in Australia.

This is because if you hold investments within superannuation, retire and create your own private income stream, the assets supporting that income stream will become tax free, both in terms of income and capital gains.

It also means you receive the full benefit of the franking credits, which are paid to you in much the same way as tax refunds are paid to PAYG taxpayers. These are cash payments that can boost dividend income by as much as 30 per cent.

Finally, I look for capital growth. I do this to ensure any investments I recommend at least keeps pace with the rate of inflation. Typically, I am more focused on generating income for clients than capital gains, but I do realize that even in the most conservative portfolio, capital gains are important.

So, these are the three key elements that I measure any investment against, and these are the three key elements that feature so strongly in every portfolio I recommend to clients.

It helps to ensure I am successful in generating as much money as possible and as safely as possible for my clients in retirement and neatly positions those clients in pre-retirement for the time when they do retire.