Six Adjustments You Can Make Right Now to Optimise Your Portfolio’s Risk-Adjusted Returns

The ground has shifted under most investors’ portfolios in recent months.  

The RBA and the Fed have once again raised rates, the ASX 200 is flat year-to-date and down 5% from its August peak, while home values have dropped for six straight months.  

Moreover, with Australian 10-year government bonds now yielding 5.3%, a portfolio built for the low-rate world of 2021 is unlikely to suit this new era. 

The good news is that the adjustments needed to position your portfolio for how things are now, and how they may become, don’t depend on the near-impossible task of correctly predicting market direction. 

The more controllable goal is to improve your risk-adjusted returns – the return earned for each unit of risk – in all market scenarios by cutting costs, spreading your exposures and removing avoidable mistakes. 

Here are six worth considering right now… 

Key Takeaways 

• Rule-based rebalancing protects investors from the timing errors that cost the average fund investor 1.2% p.a. 
  
  
• Australia represents just 1.5% of the global share market, yet most portfolios have a home market bias with most of their equity exposure on the ASX. 
  
  
• Property exposure is often far larger than it looks once investment properties, bank shares and property credit are counted. 
  
  
• Active fund management requires careful selection. Over 10 years, 87.6% of active Australian equity funds and 95.2% of active global equity funds trailed their benchmarks. 

Meet the Clarkes: A Typical Portfolio Under the Microscope 

Maria and Stan Clarke are a typical (hypothetical) couple in their late 50s with $1.6 million in investable assets.  

They are both still working, but they are starting to think more seriously about their financial security in retirement, which is 10 to 15 years away. 

They hold $600,000 of equity in a $900,000 Brisbane investment property, $350,000 in direct ASX shares (mostly the big four banks and BHP), $150,000 in an ASX 200 ETF, $100,000 in an active Australian share fund charging 1.2% p.a., $100,000 in a global share ETF, $150,000 in a private credit fund, and $150,000 in cash. 

On paper, that’s seven holdings diversified across a range of asset classes. 

In practice, 94% of the Clarkes’ wealth rides on the Australian economy, with much of it tied to housing. 

It’s time to put the Clarkes’ finances under the microscope with a view to improving their long-term risk-adjusted returns. 

Here are the valuable lessons they learnt and the portfolio adjustments that followed… 

1. Rebalance by Rule, Not by Feel 

In truth, the Clarkes have never rebalanced their portfolio. They have only ever thought about it. 

As a result of strong capital growth, their Brisbane investment property and global ETF now make up a larger share of their portfolio than at the time of investment. 

In contrast, the weightings of their cash and direct ASX shares have fallen due to underperformance. 

As such, their portfolio has drifted further towards growth assets, which now represent 81%, while their defensive assets have shrunk to 19%. This compares with their initial goal of 70% growth/30% defensive. 

That shift happened without a single trade or conscious investment decision. 

Rebalancing their portfolio would restore their intended risk and return profile. 

Rebalancing by rule, rather than in response to a market move, will stop their emotions from taking over. 

In the Clarkes’ case, rebalancing back to their 70% growth target means shifting $180,000 from growth to defensive assets.  

That’s easier said than done when their largest growth holding is a single property that can’t be sold in parts. That is why they are considering selling their Brisbane investment property altogether and reallocating the proceeds into global ETFs and funds, low-duration bond ETFs and gold ETFs. 

Morningstar’s 2026 Mind the Gap study shows why rebalancing matters.  

It found that the average dollar invested in US mutual funds and ETFs earned 8.7% p.a. over the decade to December 2025, against 9.9% p.a. for the funds themselves. That glaring 1.2% p.a. gap was caused largely by poorly timed buying and selling.  

By rebalancing once a year, or whenever an asset class drifts more than five percentage points from its target weighting, you can avoid trading on emotion. 

2. Look Beyond the ASX 

Home market bias is widespread amongst Australian investors. The ASX Australian Investor Study found 58% of investors hold Australian shares, while only 16% hold international shares. 

True to the norm, 94% of the Clarkes’ wealth is invested domestically. That’s a big bet on the future of the Australian economy, and an equally big bet against everywhere else. 

When the Clarkes learnt that Australia makes up just 1.5% of the MSCI ACWI IMI global share index, against 62.7% for the US, they soon realised the folly of their ways. 

Betashares chief economist David Bassanese concurs. He expects Australian forward earnings to grow by around 8% by the end of 2027, against 17% globally, while local shares trade at a 9% valuation premium to global markets. 

A higher valuation for less than half the earnings growth doesn’t bode well for the domestic market’s relative performance through 2027. 

Currency adds another layer of uncertainty – and of protection.  

In September, global shares fell 1.1% in local-currency terms but rose 1.8% for unhedged Australian investors as the Aussie dollar slid. 

For the Clarkes, selling their direct ASX shares, which are concentrated in a handful of banks and BHP, and lifting their global equities exposure from $100,000 to $590,000 would materially reduce their single-country risk. 

This shift will also reduce their stress levels. After years of underperformance in their direct ASX equities allocation, they are ready to move on from the inherent challenges of stock picking. 

Tip: Our guide to choosing a global ex-US ETF covers how to avoid simply swapping one concentration for another. 

3. Count Your Property Exposure Properly 

We all know that much of Australia’s wealth is built on property. 

Case in point: dwellings make up 57% of Australian household assets.  

That leaves investors heavily exposed to the recent fall in residential property values. Cotality research director Tim Lawless thinks there may be more downside to come, describing a total fall of 10% to 15% as ‘a fairly reasonable estimate’. 

Housing risk hides in several places within the Clarkes’ portfolio.  

Their investment property is geared, so a 10% fall in its value would wipe $90,000, or 15%, off their $600,000 of equity.  

Their bank shares depend on mortgage lending, and their private credit fund lends largely to property developers. 

Counted together, more than 60% of their wealth is tied to Australian property and property credit.  

Investors in this position may want to think twice before adding more property funds and to look instead at assets with different drivers, such as infrastructure.  

For the Clarkes, selling their investment property and their bank-heavy share portfolio would remove most of this overconcentration in one step. 

4. Ensure Your Defensive Assets Are Actually Defensive 

Not all defensive assets are created equal.  

The best 12-month term deposits are currently paying 5.5% p.a., while Australian 10-year government bonds are yielding 5.3% p.a. 

Since government bonds trade on the market, their prices fall when yields rise, so they may not prove as defensive as term deposits during future bouts of volatility. 

Having said that, higher starting yields give government bonds a bigger income cushion against further price falls than they had in 2022, when shares and bonds fell together.  

For the Clarkes, keeping $75,000 in cash for emergencies and building a $330,000 defensive core from a ladder of term deposits and low-duration bond funds would add a genuine shock absorber to their portfolio.  

A modest allocation to gold ETFs, which have tended to behave differently from both shares and bonds, would broaden their sources of return further. 

As Bridgewater founder Ray Dalio puts it, ‘My mantra of investing is 15 good uncorrelated return streams’, which he says can lower risk by ‘up to 80%’. 

5. Pay Less Where Active Management Rarely Pays 

The most useful starting point in the active versus passive debate is recognising that most active funds underperform over the long term. 

The data is unequivocal on this front. 

The SPIVA Australia Scorecard found 87.6% of active Australian equity funds and 95.2% of active global equity funds underperformed their benchmarks over the 10 years to December 2025. Active bond managers fared better, with 62.1% underperforming. 

No investor aims to underperform, so this is worth understanding for anyone investing in active funds.  

Fees also compound, just as returns do. 

On $500,000 invested for 20 years at a 7% p.a. gross return, a total annual cost of 0.15% produces a portfolio worth $1.88 million, versus $1.43 million at a cost of 1.5% p.a. – a difference of $448,000. 

Vanguard founder Jack Bogle summed it up: ‘The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.’  

A common response to both challenges is a core-and-satellite approach: low-cost index ETFs at the centre, with active managers used where they have a relatively stronger record, such as small caps or fixed income. 

For the Clarkes, replacing their fund charging 1.2% p.a. with an index ETF charging 0.15% p.a. would save them $1,050 a year before the effects of compounding.  

6. Match Liquidity to Your Real Needs 

One of the truths of investing is that liquidity tends to disappear exactly when it is most needed.  

In August, ASIC chair Sarah Court warned of ‘the first significant cracks’ in private credit, with several managers restricting redemptions. 

The Clarkes are responding by listing the cash they will need over the next one, three and five years, and keeping illiquid holdings below the amount they are confident they won’t need. 

It’s a prudent move. Between their property and private credit, 47% of the Clarkes’ wealth is effectively locked up.  

Their investment property is illiquid too: it may take months to sell and can’t be sold in parts.  

Halving their private credit exposure to $75,000 and testing their private credit fund against ASIC’s concerns about valuation and governance would reduce their liquidity risk.

Bringing It All Together 

The Clarkes are determined to secure their financial future, so they plan to enact all six changes.  

The biggest decision is to sell both their Brisbane investment property and their direct ASX shares.  

Once the $300,000 mortgage is repaid, the two sales free up $950,000, which they will combine with the $100,000 from their active fund, half of their private credit holding ($75,000) and half of their cash ($75,000), giving them $1.2 million to reinvest. 

Here’s how they plan to deploy the capital: 

• Global equities: $590,000 in low-cost global ETFs and funds, up from $100,000, giving them meaningful exposure to the 98.5% of the global share market outside Australia. 
• Australian equities: $350,000, made up of a $300,000 core in ASX 200 index ETFs (including their existing ETF and the proceeds of their active fund) and a $50,000 active small-cap satellite. 
• Global infrastructure: $100,000 in a listed infrastructure fund, an asset class with different drivers from Australian housing. 
• Gold: $80,000 in a gold ETF as a diversifier. 
• Bonds and term deposits: $330,000, split between a $130,000 term deposit ladder and $200,000 in low-duration bond ETFs and funds. 
• Private credit: $75,000, half their previous holding, in a private credit fund that passes their liquidity and governance checks. 
• Cash: $75,000, held in a cash account as an emergency buffer. 

Taken together, the changes would: 

• Bring their growth assets back from 81% to their 70% target, while lifting their defensive assets from 19% to 30%; 
  
  
• Cut their exposure to Australian assets from 94% to 52%; 
  
  
• Reduce the share of their wealth tied to Australian property and credit from more than 60% to 10%; 
  
  
• Shrink their illiquid holdings from 47% of their wealth to less than 5%; 
  
  
• Remove their $300,000 investment loan, and with it their exposure to further rate rises on that debt; and 
  
  
• Lower their fund costs, with active fees reserved for a small satellite allocation. 
  
  

Please note: these figures are simplified. They ignore selling costs and capital gains tax, both of which would reduce the amount available to reinvest.  

Preparing for Multiple Futures 

The most reliable strategies to improve long-term risk-adjusted returns are unglamorous: rebalance by rule, own more of the world, count your hidden exposures, make sure your defensive assets are genuinely defensive, pay less for what you own and never lock up money you may need. 

In a year when shares, housing, interest rates and tax rules have shifted all at once, these enhancements are likely to add more value than any market call. 

Frequently Asked Questions 

What Is a Risk-Adjusted Return? 

A risk-adjusted return measures how much return an investment earns for the risk it takes, usually measured by volatility. Two portfolios with the same return are not equal if one experienced far larger swings along the way. 

How Often Should I Rebalance My Portfolio? 

Many investors rebalance once a year, or when an asset class moves more than about five percentage points from its target. The exact rule used matters less than having one and sticking to it. 

How Much of My Share Portfolio Should Be International? 

There is no single right number. Australia represents just 1.5% of global share markets, so a portfolio held mostly on the ASX is a large active bet on one country. The right level depends on individual goals, tax circumstances and currency preferences. 

Do the CGT Changes Affect ETFs and Managed Funds? 

Yes. From 1 July 2027, the 50% CGT discount for individuals and trusts (including individual partners in partnerships) will be replaced by indexation of the cost base and a 30% minimum tax on real gains. This applies to ETFs and managed funds, as well as to shares and investment property, although new residential dwellings retain concessional treatment. Gains accrued before that date keep the 50% discount. 

Are Active Funds Worth Paying For? 

The SPIVA data shows that most active funds in large share markets trail their benchmark over long periods, but outcomes vary by asset class and manager. Many investors use low-cost index funds as a core and reserve active fees for areas where managers have a stronger record.

Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.