Why risk can build while everything feels comfortable

When markets fall, investors immediately ask how much risk they are taking. Strong markets create a quieter problem. The assets that rise fastest gradually become a larger share of the portfolio, even when nobody has made a deliberate decision to take more risk.

That matters because the name on the portfolio does not change with the market. A portfolio can still be called ‘Target 40’, ‘Target 60’ or ‘Target 80’ while the mix underneath has moved materially away from the allocation originally selected. Over time, the portfolio an investor owns can become meaningfully more growth-oriented than the portfolio they chose.

We have simulated three representative strategic portfolios. The purpose is not to predict the next correction. It is to test a simpler question: when markets are allowed to run without rebalancing, how much can the portfolio change – and does a risk-defined approach produce a different experience for investors?

What we tested

The three conventional portfolios use the same underlying building blocks, but at different starting risk levels. Global equities combine unhedged, hedged, emerging-market and global small-company exposures; real assets combine Australian listed property, global infrastructure and global property; fixed interest is split equally between Australian and global bonds.

Representative strategic asset allocations

Asset class	Target 40	Target 60	Target 80
Global equities	16%	25%	35%
Australian equities	16%	25%	35%
Real assets	8%	10%	10%
Fixed interest	40%	30%	15%
Cash	20%	10%	5%
Growth assets	40%	60%	80%

Source: Strategic allocations supplied by Innova Asset Management. Growth assets comprise equities and real assets.

For the long-term drift test, each portfolio is allowed to evolve with market returns and receives no rebalancing. The common history runs from February 2005 to August 2026. For the performance comparison, we use the five years to 31 August 2026, so the conventional portfolios and the three Innova Risk Defined Fundamental portfolios are measured over the same period.

Over time, markets can change the portfolio for you

The long-term result is striking. Target 40 begins with 40% in growth assets and ends with 63.6%. Target 60 moves from 60% to 79.8%, while Target 80 moves from 80% to 91.5%. Nothing in this simulation required an active decision to increase risk. The change came from the compounding effect of different asset classes earning different returns.

Long-term growth-asset drift without rebalancing

Period: February 2005 to August 2026. No contributions, withdrawals or rebalancing. Calculations by Innova Asset Management using supplied benchmark data.

The lower-risk portfolio experiences the largest change in percentage-point terms because it begins with more defensive assets available to be displaced. In practical terms, a client who selected a 40% growth portfolio could eventually be holding something much closer to the starting risk level of Target 60. A Target 60 investor could end up close to the starting point of Target 80.

Regular rebalancing fixes that mechanical problem by returning the weights to target. But rebalancing only answers the question ‘where is the money invested?’. It does not necessarily answer the harder question: ‘where is the risk coming from?‘. Volatility, correlations and the behaviour of each sleeve can change even when asset weights are put back exactly where they started.

The five-year comparison

Over the five years to August 2026, allowing the conventional portfolios to drift modestly lifted returns because growth assets performed strongly. It also lifted volatility. The no-rebalance versions finished with growth allocations of 48.8%, 68.7% and 85.5% respectively – around six to nine percentage points above target.

More importantly, the comparison with Innova’s Fundamental portfolios shows that a higher return did not require accepting the same level of realised variability. Preservation, Wealth Creation and Aspiration each produced a higher annualised return than the monthly-rebalanced conventional portfolio at its corresponding risk level, while experiencing materially lower volatility and shallower maximum drawdowns over the period.

Five years to 31 August 2026

Portfolio	Method	Return p.a.	Volatility p.a.	Max drawdown	Return / volatility
Target 40	No rebalance	4.2%	6.4%	-11.1%	0.67
Target 40	Monthly rebalance	4.0%	6.3%	-11.0%	0.64
Fundamental Preservation	Risk-defined	4.3%	3.5%	-5.8%	1.25
Target 60	No rebalance	5.7%	8.3%	-13.0%	0.69
Target 60	Monthly rebalance	5.5%	8.1%	-12.9%	0.68
Fundamental Wealth Creation	Risk-defined	6.7%	6.3%	-9.7%	1.07
Target 80	No rebalance	7.4%	9.9%	-14.3%	0.75
Target 80	Monthly rebalance	7.3%	9.8%	-14.2%	0.74
Fundamental Aspiration	Risk-defined	7.9%	7.8%	-11.8%	1.02

Source: Morningstar and benchmark data supplied by Innova Asset Management; calculations by Innova Asset Management. Return/volatility is a simple ratio and is not a Sharpe ratio.

The Target 60 comparison is a useful example. Monthly rebalancing produced 5.5% a year with 8.1% annualised volatility and a maximum drawdown of 12.9%. Fundamental Wealth Creation returned 6.7% a year with 6.3% volatility and a 9.7% maximum drawdown. The point is not that one five-year period proves a permanent relationship. It shows why a fixed growth percentage is an incomplete description of portfolio risk.

The same pattern is visible at either end of the range. Fundamental Preservation delivered 4.3% a year with 3.5% volatility, compared with 4.0% and 6.3% for the rebalanced Target 40. Fundamental Aspiration returned 7.9% with 7.8% volatility, compared with 7.3% and 9.8% for the rebalanced Target 80.

Five-year allocation drift

Portfolio	Target growth	August 2026 growth	Drift
Target 40	40.0%	48.8%	+8.8
Target 60	60.0%	68.7%	+8.7
Target 80	80.0%	85.5%	+5.5

Period: September 2021 to August 2026. No rebalancing.

What this means for investors

A strong market is usually experienced as good news, and rightly so. But it can also make risks less visible. Winning assets become larger, recent volatility can feel benign, and a portfolio that has changed materially can still carry exactly the same label it had five or ten years earlier.

Rebalancing remains an important discipline because it prevents market performance from permanently rewriting the strategic asset allocation. The analysis also suggests that this should not be the end of the conversation. Two portfolios with the same growth allocation can still have very different realised volatility, drawdown and diversification characteristics.

That is the distinction behind Innova’s risk-defined approach. The objective is not simply to keep a portfolio inside a prescribed allocation range. It is to keep the amount and source of portfolio risk deliberate as market conditions, correlations and asset behaviors change. Good risk management often feels least necessary when markets are strong. That is precisely when it can be most valuable.

Data note: Five-year figures use monthly total returns from September 2021 to August 2026. Representative Target 40, Target 60 and Target 80 portfolios use the supplied strategic weights and benchmark/index proxies, with no fees, taxes, cash flows or transaction costs. Monthly rebalancing resets to target weights each month. The long-term drift series runs from February 2005 to August 2026. The supplied files did not contain a standalone long-run FTSE Developed Core Infrastructure 50/50 index; S&P Global Infrastructure is used for the long-history simulation, with Macquarie True Index Global Infrastructure used as an extension where required. Simulations are illustrative and do not represent actual portfolio performance. Past performance is not a reliable indicator of future performance.

The information contained in this document is commentary only and cannot be construed as personal advice. The views expressed here are subject to change at any time. To the extent permitted by law no liability for loss or damage is accepted for reliance on or use of the information contained in this document.