Act when you know.

Temple of Apollo, Delphi

Introduction

Each year I review my investment policy to ensure it stays relevant to available data and evidence, and will serve my ultimate investment goal of financial independence.

The summary is based on my past reviews and decisions, and is largely unchanged from 2024 and 2025. It is designed to serve as a reference for the chain of reasoning underpinning portfolio design and allocation decisions through the year – so it remains unchanged where my conclusions have not changed.

In 2019 I increased the equity allocation in the portfolio to 75 per cent. In 2021 the policy was adjusted to move towards a long-term target of an equal allocation of global and Australian equities over the next several years.

The most significant change following the 2022 review was to slightly increase the overall equity allocation, to 80 per cent, by reducing the target bond allocation.

The goal of reaching an equal allocation of global and Australian equities has changed in this review. The current approach target allocation adopted in 2023 is discussed and revised further below.

Specific asset allocation targets

Based on the review and considerations below the portfolio allocation targets are as follows:

• 80 per cent equity-based investments, comprising:
  • 52 per cent international shares (e.g 65 per cent of equity investments)
  • 28 per cent Australian shares (e.g 35 per cent of equity investments)
• 5 per cent bonds and fixed interest holdings, comprising:
  • 2 per cent Australian bonds and fixed interest
  • 3 per cent international bonds and fixed interest
• 7.5 per cent physical gold holdings and securities; and
• 7.5 per cent Bitcoin.

Reasons for allocation targets and assumed asset returns

Assumed equity returns

The equity component of the portfolio provides the fundamental engine of returns in the portfolio, with the most sustained historical record of outperforming other traditonal asset classes, and maximising after inflation returns.

Calculation of the overall portfolio target previously involved setting an assumed return for each asset class, however, this has been replaced since 2021 with the use of the safe withdrawal rate.

To anchor forward expectations, however, I still find the estimation of assumed returns a question of interest.

In terms of long-term real equity returns, this year I have adopted an estimate 5.1 per cent based on the geometric mean of Australian equity returns over risk-free assets over the period 1883 to 2024.

For my specific purposes, the geometric mean appears to continue to be more appropriate than the previously used average of the arithmetic and geometric mean, and its lower value also reflects lower expectations going forward.

For global equities, the equivalent real return estimate used last year was 5.2 per cent, a long-term historical figure (from 1900-2024) sourced from the 2025 Global Investment Returns Study.

Allocation between Australian and global equities

The split between Australian and international equities is designed to maximise total returns and minimise undue portfolio volatility, while taking advantage of the tax-advantaged nature of Australian franked dividends.

Approach to allocation – movement to 50/50 allocation

The specific equities sub-targets changed in the investment policy review of 2021.

Previously, I had sought to achieve a target 60/40 split between Australian and foreign equities, which an academic survey published in 2013 estimated to be optimal for most Australian investors (see Klement, Greenrod and O’Neill Optimal Domestic Equity Allocations for Australian Investors and the Role of Franking Credits published in the Journal of Wealth Management and also discussed previously here).

A key finding of that study is that Australian equity exposures at higher rates significantly increase portfolio volatility, and maximum potential losses.

The specific optimal 60/40 split suggested by the study is, importantly, a product of the historical data and the characteristics of volatility in past markets.

As such, it retains value in application only to the extent that fundamental relationships between Australian and global equities may not have changed in the period since 2013. I have previously noted that as time passes, that assumption becomes more questionable, meaning that a 60/40 split provides no certainty of continuing to be optimal going forward.

In 2021 I changed the target allocation to a 50/50 split of Australian and foreign equities. This approach was adopted to:

• Assume a ‘neutral’ position on relative equity market performance – Over the long-term in conceptual terms, an equal allocation reduces the portfolio risks of any future Australian equities underperformance compared to global equity indices.

• Recognise the after-tax benefits of franking credits – The remaining 50 per cent weighting to Australian equities still sits close to the optimal balance for reduced portfolio variance and maximisation of franking credit benefits suggested in the Klement et al paper discussed above.

• Reduce portfolio variance – A 50/50 per cent weighting is supported as a “minimum variance” (i.e. lowest volatility) portfolio allocation by this 2012 Vanguard study (pdf).

• Recognise that pure ‘market capitalisation’ weighting is not required – Due to correlations between Australian and global markets, and the specific benefits provided by the current franking credit regime, it is not optimal to hold the Australian market at the low weighting (2-3 per cent) which would arise from a pure market capitalisation weighting approach.

The Vanguard study (pdf) mentioned above provides an excellent structured framework for individual investors thinking about these issues (see in particular Figures 4 and 11).

A revised approach: movement to greater international diversification

Through 2025 I reviewed State Street Global Advisers Equity ‘White Paper’ Home Bias in Australian Equity Allocations: Diminished Portfolio Outcomes (October 2024). This report provides updated estimates of efficient optimised allocations using a 15-year data set covering 2009 to 2024.

The report generates much higher estimates of the ‘maximally efficient’ level of international allocation based on this period, and much lower estimates of the impact of franking credits in raising optimal domestic equity allocations.

As an example, and using some important assumptions, the paper suggests many Australians would achieve the ‘Maximum Sharpe’ (i.e. the most return per unit of risk or volatility) allocation with an international allocation of 91 per cent, and a domestic allocation of 9 per cent. Other interesting but less formal analytical work has posited a ‘Sharpe point’ of up to a 33 per cent Australian allocation, and derived longer-term average estimates over 1970 to 2024 of between 32 and 41 per cent.

Interestingly, for the period, the SSGA work estimates the conceptually distinct point of ‘minimum volatility’ – which was the basis of my previous allocation decisions – at a 53/47 domestic and international allocation.

This brings into focus the question of departing from a ‘volatility minimising’ standard, towards a ‘maximum Sharpe’ point in future equity allocations.

There are a range of considerations in play.

As I have noted, in this phase of the journey, potentially volatility minimisation is a desirable objective, particularly as bonds have failed at this task in recent years. Yet, adopting this involves a trade-off from the theoretically optimal return per unit of risk, and this performance penalty obviously has the capacity to compound over future decades.

In making this decision, the features and limitations of each study also need to be taken into account.

Some studies rely on long data series, potentially more representative of multiple cycles than shorter periods, but, equally, potentially less relevant due to the changing underlying composition and characteristics of Australian equities and their foreign counterparts.

Importantly, the SSGA study also bases its estimates on indexes that assume the holding vehicle is a superannuation account, and the small difference in the overall impact of franking credits to the final optimal allocation is stark, compared to the 2013 Klements paper.

An underpinning, simplifying basis for the current equal allocation has been that in a forward-looking sense, it avoids assuming either international or domestic equities will outperform. It assumes, in short, a ‘coin-toss’ on the question of whether returns will be maximised by greater global or domestic investment exposure.

Yet such an approach quite clearly does still represent a significant risk and exposure to the fate of domestic equities, albeit mitigated by the fact that Australian and international equities have less than full correlation, and Australian markets may benefit in some circumstances that result in falling global market valuations. As a crude illustration of this, financial and materials equities (such as BHP, NAB and the Commonwealth) listed in the Australian market make up around 25 per cent of the value of the total equity portfolio.

History has some other information to guide the process for decisions.

For example, it tells us that Australia’s realised equity market returns across the past century have been among the highest in the world, alongside the United States (which, relevantly, constitutes around 70 per cent of MSCI global equity benchmarks). This introduces the conceptual future risk of ‘diversifying’ from one historically ‘lucky’ market, into another arguably ‘lucky’ market – to the extent that this historical record reflects either survivorship bias or an outcome of pure chance.

The new information in the SSGA paper is – in my personal view – sufficiently compelling to warrant a change in my personal approach and allocation targeting.

As the portfolio has grown, I have been increasingly aware of the large allocation to Australia equities, and the potential vulnerability of this holding in a range of clearly plausible future scenarios for a single trade-exposed commodity exporting nation.

These scenarios include geo-political conflict, increased trade restrictions, or global recession.

Plausibly, further international diversification at the margins reduces overall portfolio exposure to these risks – even in circumstances where the same risks will impact other markets. It cannot also be discounted, as well, that Australia might once again be fortunate, and impacted less, or even benefit from some of these same types of positive events and trends, as it has generally since the early 1980s.

At present, my tentative ‘on balance’ judgement is that further international diversification may be a risk-reducing, and long-term return enhancing step, compared to the current 50/50 allocation approach. This is an inevitably imprecise and personal ex ante judgement, which may well prove incorrect after the fact.

Implementing the revised approach

There are two immediate issues with any implementation of this judgement.

First, the degree of movement.

The SSGA report findings suggest something approaching a 90/10 allocation between international and Australian shares, but based on a relatively short observation period of 15 years.

This position may well be substantially influenced by its assumptions around the marginal tax liability of a superannuation vehicle, as compared to a ordinary Australian investor. The original Klements study indicates an Australian allocation of 30-40 per cent may be optimum, in terms of minimisation of volatility and maximum possible loss, from a longer, but older data sample.

With these imperfect guideposts, a reasonable approach for my portfolio approach and circumstances may be to allow for an increase in international equities up to, initially, a range of 60 to 70 per cent of total equity holdings – with a guiding target of 65 per cent), thereby moving closer to the maximum Sharpe point indicated in the SSGA study, while also being consistent with minimising maximum potential losses and volatility as indicated in the Klements paper.

The second question, is the timing or method of movement.

On this issue, my plan is to avoid a rapid or mechanistic pursuit of a higher international exposure, in favour of a more gradual and organic movement through time, minimising avoidable tax liabilities or transaction costs.

Under this approach, rebalancing will be achieved by means of new investments, or the direction of reinvestments made over time into international equities, and occur over a period of 5-10 years.

Bonds and fixed interest

Bonds and fixed interest are intended to play a role in diversification, reducing overall portfolio volatility.

The assumed return of 1.7 per cent for these assets is in line with long term global averages measured since 1900, sourced from the 2025 Global Investment Returns Study and based on data from the Dimson, Marsh and Staunton book Triumph of the Optimists – 101 Years of Global Investment Returns.

A separate review of bond holdings in the portfolio and the relevant investment literature has reinforced the value of a small bond holding, but caused a slight adjustment in the target allocation from a simple equal weighting of Australian and foreign bonds, to a position that reflects the greater diversification benefits of international bonds.

In early 2022 the target bond allocation was reduced from 15 per cent to 5 per cent.

This was due to my personal assessment that the expected real return and diversification benefits of bonds going forward would be significantly reduced in market conditions likely to persist over the next 5 to 10 years.

At that time it was difficult to see bonds producing returns close to their long-term historical results in the near-term, following a multi-decade fall in interest rates that has acted as a sustained tail-wind for returns. In 2022 I observed that with rates at near decade lows, the prospect of significant capital loss was much more likely than any continuation of capital gains that investors have enjoyed since the early 1980s.

The substantial rise in bond yields through 2022 supported this view, and delivered deeply negative real returns for bonds. Despite the recent yield rises, at the point of investment, many bonds would currently still be expected to produce only narrowly positive real returns.

The recent falls in bond prices and rises in yields are suggestive of potentially better returns ahead, however, this remains critically contingent on inflationary outcomes over the short and medium-term.

My assessment remains that current and potential future government policies and monetary policy authority decisions are likely to dampen or eliminate the potential for bonds to profitably serve their traditional role in portfolio design.

This is a set of circumstances – with such policies sometimes termed ‘financial repression’ – that has been experienced at other times of relatively high public sector debts at a global level.

Gold

Gold is as described previously in the role of gold and Bitcoin in the portfolio primarily included in the portfolio as a non-correlated financial instrument for diversification, and to act as an insurance against extreme capital market events or conditions. I have invested in gold, principally through an exchange traded fund, since mid-2009.

No real return is assumed for gold assets held.

Bitcoin

For a significant period it has been uncertain exactly what role Bitcoin may or may not play in investment markets, or as an emerging store of value. As such it remains a high risk and volatile component of the portfolio. No real return is assumed for Bitcoin held, despite its strong performance across the past decade.

Bitcoin is included as an asset in the portfolio following the unexpected growth in value of a small exploratory investment (representing around 0.5 per cent of 2015 portfolio value) to a sizeable component of current overall portfolio value.

At different times Bitcoin has exhibited different correlations to equities, but its overall and enduring investment characteristics going forward cannot yet be clearly disentangled from price impacts from its wider adoption to date.

Generally, over the medium-term it has had an extremely low correlation to the price of gold, potentially making it a valuable additional source of diversification at times where gold fails to serve its intended objectives within the portfolio. Bitcoin also represents, in some senses, an ‘option’ on some forms of monetary policy breakdown and market disorder.

In this way, I view it as broadly part of the ‘alternatives to equity’ portfolio (including gold and bonds) which has constituted between 20-25 per cent of the target portfolio over recent years.

The purpose of this component of the portfolio is diversification and protecting real wealth and purchasing power in circumstances where the primary ‘engine’ of the portfolio – equities – may temporarily be adversely impacted by market events.

Recognising this, and in line with its sharp volatility, and the potential risks and costs of seeking to actively trade Bitcoin, I have not and do not propose to trade to target the specific Bitcoin target allocation.

Rather, the allocation level of 7.5 per cent represents an aspirational average level that I would be comfortable with holding over an extremely long-time frame.

The achievement of this target allocation in any particular year or even five year period is a matter of less importance to me in my personal circumstances. Of more significance is seeking to target over time around 20 per cent of the portfolio being non-correlated to the performance of equities.

Property

I have no formal property allocation for investment purposes, following my exit from my tiny exploratory investments in fractional residential real estate through BrickX.

In the current market environment my assessment is Australian property is likely to enjoy low yields and returns for a considerable forward period, and not offer sufficient diversification benefits over Australian and global equities or other available asset classes. Where tax effective avenues exist to exit this allocation, they will be taken.

January 2026

Disclaimer

This blog is a record of my journey and decisions, based on my circumstances.

The specific portfolio allocation and approach described in it has been determined solely based on my personal circumstances, objectives, assessments and risk tolerances.

It is provided for general information and entertainment purposes only. It is not personal financial advice, or a recommendation to invest in any particular investment product, security or asset, or adopt any specific strategy, and investors considering these issues should undertake their own detailed research or seek professional advice.