There’s a reason why lottery businesses are so profitable. Many people dream about spending their winnings on paying off debts, luxury items, and vacations, perhaps even helping family. However, how many of us consider investing as part of those fantasies?
While hitting the jackpot may be unlikely, receiving a financial windfall such as an inheritance or a redundancy payout is more probable. In such cases, investing for future growth becomes a prudent consideration. But how should one invest a $100,000 lump sum for growth in today’s market environment? Should investors be conservative or aggressive given the current market highs?
Current Market Environment
This question was posed to Charlie Viola of Viola Private Wealth, who shared insights on investing for high-net-worth clients with flexibility to take on risk. According to Viola, the fact that markets are at all-time highs is not necessarily a concern. Historically, markets have always reached new highs over time, benefiting investors.
However, Viola notes that domestic equities appear stretched, with high multiples. Australian banks and consumer staples, for instance, are among the most expensive globally. Despite this, companies like Coles and Woolworths continue to perform well, driving revenue into client portfolios.
“We are seeing that mega-tech companies have continued to gobble up their competitors and protect their margins. Positive news is floating up to the top and it continues to drive markets forward,” Viola explained.
Investment Strategies for Growth
Viola advises clients to maintain their equity investments rather than withdrawing funds. For new investments, he suggests keeping a portion in cash, ready to capitalize on opportunities during market dips.
“If we’re investing new money for clients, we’re probably keeping 50 or 60 cents of what we would otherwise allocate to equities and keeping some powder dry,” Viola said. He emphasizes the importance of being ready to act when markets show weakness, such as a poor performance from a major company like Nvidia.
Balancing Risk and Opportunity
In response to client concerns about geopolitical tensions, such as the conflict between Taiwan and China, Viola encourages a focus on fundamentals and asset allocation. He advocates for disciplined, parameter-driven investing to avoid overexposure to any single asset class.
“Asset allocation makes up around 85% of total returns over time,” Viola stated, highlighting the importance of diversification.
For clients willing to take on more risk, Viola utilizes private markets extensively, with exposure to private equity, private debt, infrastructure, and special situation funds. He notes that public markets have delivered significant returns over the past decade, but advises keeping some cash available for future opportunities.
Portfolio Recommendations
If a client were to invest $100,000 for growth, Viola suggests a portfolio split between domestic and global large-cap equities. He recommends investing $70,000 in proven companies with strong balance sheets and management, using dollar-cost averaging over six months to mitigate risk.
- Domestic equities: $35,000 in SPDR S&P/ASX200 ETF (ASX: STW)
- International equities: $35,000 in iShares Global 100 ETF (ASX: IOO) or Vanguard US Total Market Shares Index ETF (ASX: VTS)
Viola believes in asset allocation and genuine diversification, noting that ETFs provide the best opportunity for diversification with $100,000. He advises against private markets for smaller investments due to illiquidity and the need for significant capital to diversify adequately.
Future Market Considerations
Looking ahead, Viola explains that if markets sell off heavily but underlying data remains strong, it presents an opportunity to increase exposure to quality assets. Conversely, if markets continue to rally, he plans to maintain disciplined asset allocation, reducing exposure where necessary to maintain dry powder.
“Our biggest trading days are when markets fall, not when they go up. We’ve added more value in periods of dislocation than when markets are just going up,” Viola reflected on past market behavior.
Viola remains comfortable holding current investments, emphasizing the importance of being prepared for market fluctuations and taking advantage of opportunities as they arise.
