Financial Literacy: The Blueprints

Article Two -  14 May 2025

Would you build a home without blueprints? 

No, I don’t think that would be a particularly good idea. Similarly, it’s just as important to have blueprints when building your investment portfolio. These blueprints are the result of your investment philosophy and strategy.

At the most basic level, there are two key components when constructing an investment portfolio: income assets and growth assets. 

Income assets are investments that generate a stream of income, and typically offer lower returns, lower volatility, and lower costs compared to growth assets.  Common examples of income assets include cash & cash equivalents, term deposits, and fixed Income securities such as bonds.

Growth assets, on the other hand, consist of shares, listed property, and anything that is not cash, cash equivalents, or fixed income securities. Over the long term, growth assets tend to deliver higher returns, mostly from capital appreciation, although some growth assets do pay dividends.

In my view, the most important decision any investor can make is determining the proportion of growth assets in their portfolio. This decision has a significant impact on the portfolio’s overall return. 

There is a famous 1986 research paper[1] written by Gary Brinson on the performance of US Pension Plans over a 10-year period. This study determined 93.6% of the variation in returns was due to asset allocation — that is, how much of the portfolio was allocated to growth assets. This means that factors like security selection and market timing contributed just 6.4% to the returns.  

Conclusion: Investors should focus their efforts on getting the percentage of growth assets in their funds or portfolio correct. 

Next week, we’ll explore a few other important factors to consider.

If you found the article helpful and would like to connect with Joe, please click HERE. 

 

Joe Byrne
Investment Advisor
+64 21 042 6223

 

 

 

 

 

[1] “Determinants of Portfolio Performance” Gary P. Brinson, CFA, Randolph Hood, and Gilbert L. Beebower, Financial Analysts Journal, 1986.

Information and Disclaimer: This article is for information purposes only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to your Financial Adviser. This article has been prepared from published information and other sources believed to be reliable, accurate and complete at the time of preparation. While every effort has been made to ensure accuracy neither JMI Wealth, nor any person involved in this publication, accept any liability for any errors or omission, nor accepts liability for loss or damage as a result of any reliance on the information presented.