Asset Allocation.
Ah, please do not be frighten off by this pair of imposing words my dear friends, just like how I once was.
But Mr.PassivePeon is no pussy though, as I made the effort to do some simple research and grew to like this easily implementable and understood strategy.
Asset allocation is merely a very systematic strategy to maximise your returns based on your risk appetite, by adjusting the proportions of different assets class (equities, bonds, cash, etc) in your portfolio, and most importantly, you abiding to the system at all time.
However, today, I am not going to break down into details the essence of this strategy as it has been very well covered online.
Instead, I am going to share the 'whys' and 'hows' of my assets allocation implementation.
At the start of 2015, my assets were very disproportionate, highly skewed towards equities, particularly REITS listed in Singapore {"S-REITS").
Percentage
| ||
Portfolio
Allocations
| ||
Cash/Bonds
|
45.29%
| |
Equities
|
54.71%
| |
Total
|
100%
| |
Equities Allocations
| ||
ETF
|
4.62%
| |
Income Stocks
|
95.38%
| |
Growth Stocks
|
0%
| |
Total
|
100%
| |
After reading about diversifying, assets allocation, index investing, I became smarter wiser aware that there are a few critical disadvantages with the above portfolio allocation:
- My overall portfolio returns will be adversely affected if the S-REITS sector is facing headwinds as I have placed all my eggs in one basket.
- I wouldn't be able to ride on the uptrend if the other market segments starts being looked upon favorably by investors as I wasn't vested in them.
- In order to generate some meaningful returns, I have to be really good at analyzing all the individual stocks that I am vested in; either that, or I have to be really lucky.
So I started to think of diversifying to other segments, in order to reduce concentration risk, as well as to increase my earning opportunity.
But I know nuts about others market segments! And as the world greatest investor, Warren Buffett once said, "Never invest in a business you can't understand.".
Luckily I discovered this magical instrument, which is the Exchange Traded Fund (ETF)!
ETF are funds that tracks the markets by investing in a basket of assets that encompass the markets it is tracking, such as the local STI ETF and the global VWRD. This allows me to diversify my assets easily without me spending millions of hours to understand the business nature of all the vested businesses!
So early last year (2015 I mean), I decided that in order to diversify risk and increase my chances of riding on any random markets uptrend, I will try to allocate my assets in the following proportion:
During mid-2015, I learned about a global ETF, the VWRD, which made me realize how small my local Singapore equities market is, when compared to the rest of the world (Creative vs Apple, anyone remember?). Hence, I decided to allocate some VWRD into my portfolio, so as to gain some global exposure and increase portfolio diversification.
By the end of 2015, my portfolio allocation is as follows:
Close but still some way off my ideal asset allocation. But this is not what's important!
What's important is the question on whether the strategy of assets allocation and diversifying has helped me?
ETF are funds that tracks the markets by investing in a basket of assets that encompass the markets it is tracking, such as the local STI ETF and the global VWRD. This allows me to diversify my assets easily without me spending millions of hours to understand the business nature of all the vested businesses!
So early last year (2015 I mean), I decided that in order to diversify risk and increase my chances of riding on any random markets uptrend, I will try to allocate my assets in the following proportion:
Percentage
| ||
Portfolio
Allocations
| ||
Cash/Bonds
|
17%
| |
Equities
|
83%
| |
Total
|
100%
| |
Equities Allocations
| ||
ETF
|
50%
(All 50% in STI ETF) | |
Income Stocks
|
40%
| |
Growth Stocks
|
10%
| |
Total
|
100%
| |
During mid-2015, I learned about a global ETF, the VWRD, which made me realize how small my local Singapore equities market is, when compared to the rest of the world (Creative vs Apple, anyone remember?). Hence, I decided to allocate some VWRD into my portfolio, so as to gain some global exposure and increase portfolio diversification.
By the end of 2015, my portfolio allocation is as follows:
Percentage
| ||
Portfolio
Allocations
| ||
Cash/Bonds
|
20.15%
| |
Equities
|
79.85%
| |
Total
|
100%
| |
Equities Allocations
| ||
ETF
|
49.24%
(34.33% STI ETF, 14.91% VWRD) | |
Income Stocks
|
50.76%
| |
Growth Stocks
|
0%
| |
Total
|
100%
| |
Close but still some way off my ideal asset allocation. But this is not what's important!
What's important is the question on whether the strategy of assets allocation and diversifying has helped me?
And my answer will be.. Yes of course it did! Although the Singapore equities market fell by about 15% last year, my diversified portfolio has made a gain of 0.97%.
Which means I outperformed the market!
Woah woah, seems like this is the first time I used the word, 'outperformed'.
Woah woah, seems like this is the first time I used the word, 'outperformed'.
Okay, that's a very big word to use and kinda lame I know =_="
But for an inexperience and lousy investor like me, it's a damn freaking awesome feeling to beat the market!
Another reason I believe this strategy has helped me is the reduction of my eye-bags. I'm serious! Apparently, I am sleeping better nowadays, assured by the fact that my improved and diversified portfolio has better resilience to market shocks.
However, I gotta continue to work hard and keep up with the momentum. Currently, I am underweight in VWRD and I have no growth stock in my portfolio. I believe I can still squeeze a better performance if I improve on my allocation. So for 2016, I will work towards the following target allocation:
Percentage
| ||
Portfolio
Allocations
| ||
Cash/Bonds
|
18%
| |
Equities
|
82%
| |
Total
|
100%
| |
Equities Allocations
| ||
ETF
|
50%
(25% STI ETF, 25% VWRD) | |
Income Stocks
|
40%
| |
Growth Stocks
|
10%
| |
Total
|
100%
| |
18% of my assets will be either in cash or bonds, to function as my warchest so that I am able to make opportunity dips into the market during crashes.
82% will be allocated for equities, which has been proven to be one of the better performing assets class over the long-term.
For my equities allocation, I have choose three equities class to be vested in.
10% will be set aside for growth stocks, which offers better returns at a cost of higher risk. Getting some growth stock will also aid me in my personal development, as it will hone my skill in researching and analyzing companies to be vested in.
40% will be allocated to income stocks, such as REITS and business trust, which tends to offer a steady yield at a cost of slower growth. This equity class will form the backbone of my portfolio as it is capable of offering a steady flow of passive income via regular dividends payout.
50% of my equities will be focus on ETF, with an allocation of 25% for the local STI ETF and the balance to the global VWRD. While income stock will be my backbone, ETF will form the main 'body' of my portfolio, offering sustainable growth by diversifying among some of the largest companies in the world (Macdonald, Apple, etc).
Done! I am done with planning my asset allocation for 2016.
While my method of assets allocation is definitely not the most ideal ones. I figures it suits me the most given my current financial knowledge, age, laid-back(aka lazy) personality, as well as my moderate risk appetite.
If you have only just started out on your investment journey, I would feel that it will be good if you read more about the various strategies (asset allocation, permanent portfolio, dollar-cost averaging, etc) and slowly nibbles on small positions and tweak your portfolio in which the risk-reward is at a level where you will be comfortable with.
Done! I am done with planning my asset allocation for 2016.
While my method of assets allocation is definitely not the most ideal ones. I figures it suits me the most given my current financial knowledge, age, laid-back(aka lazy) personality, as well as my moderate risk appetite.
If you have only just started out on your investment journey, I would feel that it will be good if you read more about the various strategies (asset allocation, permanent portfolio, dollar-cost averaging, etc) and slowly nibbles on small positions and tweak your portfolio in which the risk-reward is at a level where you will be comfortable with.
If you made any losses, do not take it too hard and just treat it as tuition fees for a lesson on Mr.Market.
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