The most fundamental portfolio decision is how much to hold in growth assets (shares, property) versus defensive assets (bonds, cash). This split determines your portfolio’s expected return, volatility, and ability to withstand market downturns.
Growth Assets
Growth assets are investments expected to grow in value over time, delivering returns through capital appreciation and income. They carry higher short-term volatility in exchange for higher long-term returns.
Australian shares
- Historical return: ~9–10%/year (total return, before inflation) over long periods
- Dividend yield: ~4–5% gross (including franking credits)
- Volatility: Can fall 30–50% in severe bear markets (GFC 2008: ASX fell ~50%)
- Examples: VAS, A200, individual ASX companies
International shares
- Historical return: ~8–10%/year (global developed markets, before inflation)
- Volatility: Similar to Australian shares
- Examples: VGS, IVV, IWLD
Property (listed REITs)
- Historical return: ~7–9%/year (total return)
- Yield: ~4–6%
- Volatility: Moderate — less than shares, more than bonds
- Examples: VAP, SLF
Infrastructure
- Historical return: ~7–9%/year (total return)
- Income: 4–6%, partially CPI-linked
- Volatility: Lower than shares, higher than bonds
Defensive Assets
Defensive assets preserve capital, provide stable income, and reduce portfolio volatility. They deliver lower long-term returns than growth assets but perform relatively better during market downturns.
Australian bonds
- Historical return: ~4–6%/year (coupon + small capital appreciation/depreciation)
- Volatility: Low — may fall 5–15% in rising rate environments, but far less than shares
- Role: Cushion when shares fall; predictable income
- Examples: VAF, VGB, IAF
Term deposits
- Return: Fixed rate (~4.5–5.2% for 12 months in 2025–26)
- Volatility: Zero — capital guaranteed up to $250,000
- Role: Highest-safety defensive asset; opportunity cost during bull markets
Cash (high-interest savings accounts)
- Return: ~4.5–5.5% (linked to RBA cash rate, 2025–26)
- Volatility: None
- Role: Emergency fund, short-term buffer, rebalancing reserve
How Growth and Defensive Assets Behave Together
During different market conditions:
| Market environment | Growth assets | Defensive assets |
|---|---|---|
| Bull market (rising) | Strong positive returns | Modest positive / underperform |
| Bear market (falling) | Significant losses | Modest losses or positive |
| High inflation | Mixed — real assets (property, shares) help; bonds hurt | Term deposits and short bonds hold value |
| Low interest rates | Strong for growth; low yield on bonds | Low yield; push investors to shares |
| Recession | Significant falls | Bonds often rise; cash stable |
This divergence is why holding both growth and defensive assets reduces overall portfolio volatility — they don’t always move in the same direction.
The Risk-Return Trade-Off
| Portfolio mix | Expected annual return | Worst single year (est.) | Recovery time |
|---|---|---|---|
| 100% defensive | 4–5% | −5 to −10% | 1 year |
| 30% growth / 70% defensive | 5–6% | −10 to −20% | 2–3 years |
| 60% growth / 40% defensive | 6–8% | −20 to −30% | 3–5 years |
| 90% growth / 10% defensive | 7–9% | −30 to −45% | 5–10 years |
Highly illustrative — actual returns vary significantly. Based on long-run historical patterns.
Accepting more short-term risk (higher growth allocation) is historically rewarded with higher long-run returns — but only if you stay invested through downturns.
How to Choose Your Split
Ask yourself:
- When do I need this money? If within 3 years, weight defensively. If 10+ years away, weight to growth.
- How would I feel if my portfolio fell 30%? If you’d panic-sell, you need more defensive assets.
- Do I have other income sources? A stable salary or pension reduces the risk of being forced to sell investments in a downturn.
- What are my income needs? Higher income needs may require more defensive assets for predictable distributions.
Related Articles
- Asset Allocation Australia
- Risk Tolerance Investing Australia
- Investment Time Horizon Australia
- Portfolio Construction Australia
- Portfolio hub
Frequently Asked Questions
What are examples of defensive assets in Australia? Australian government bonds (VGB), broad bond ETFs (VAF), term deposits (through major banks), cash in high-interest savings accounts, and short-duration fixed income ETFs (ISEC). These are lower-risk, lower-return assets that provide portfolio stability when shares fall.
Should you have defensive assets when young? Young investors with long time horizons can typically afford more risk (higher growth allocation). However, having some defensive assets (even 5–10%) serves as dry powder for rebalancing during market falls — buying more growth assets at lower prices. Complete elimination of defensive assets is a personal preference, not a universal recommendation.
What happens to bonds when share markets crash? Historically, government bonds often rise in value when shares fall sharply — investors move money from risky assets to safe-haven bonds, pushing bond prices up. This negative correlation is the key diversification benefit of bonds in a portfolio. However, this relationship is not guaranteed — in 2022, both shares and bonds fell simultaneously as rising interest rates drove down bond prices.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.