When the tide goes out

Have you checked what your super and investments actually own lately?  

Share markets have enjoyed an incredible run, particularly in America, where excitement around Artificial Intelligence has driven some of the world's biggest technology companies higher.  

That's great while the tide is rising. The danger is assuming that because your portfolio has performed strongly, it must be appropriately diversified and structured for you.  

Index-style funds can provide broad exposure to hundreds of companies, but when a handful of very large technology companies dominate an index, investors can have significantly more exposure to the AI boom than they realise.Nobody knows whether AI is in a bubble or whether today's valuations will ultimately prove justified but one interesting stat is that to justify the trillions of dollars being spent on data centres, the western world will need to end up spending more on purchasing AI services than they currently do on food! That's the point. You don't need to predict the next market crash, but you should understand what would happen to your financial position if one occurred.  

There's an old saying that a rising tide lifts all boats. Legendary investor Warren Buffett provides the important warning: “Only when the tide goes out do you discover who's been swimming naked.”  

Nobody knows whether today's AI boom will continue or eventually correct. The important question is: what happens to you if markets fall heavily?  

That's particularly important when approaching retirement. While working, you're generally a regular BUYER of investments through super contributions. In retirement you become a regular SELLER, because your investments fund pension payments. Being forced to sell growth investments after a major fall can seriously damage retirement capital. Our previous retirement planning articles have highlighted this fundamental change and the importance of strategies designed to avoid selling investments at the wrong time.  

Large industry super funds manage investments collectively for many members. Personal financial advice is different. It considers your retirement timeframe, income requirements, other assets, appetite for risk and whether your portfolio needs specific protection against market downturns. Investment choice can also allow portfolios to be customised around individual circumstances.  

Index funds and industry funds aren't necessarily bad. The danger is assuming strong recent returns mean your investments are right for you.  

When the tide eventually goes out, that's when you'll find out.  

For a free consultation with local people who understand these and other financial matters, contact Eclipse Financial Planning in Cannonvale on 4946 7359 or visit www.eclipsefp.com.au.  

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