Hi Singaporean millennials!
Are you investing currently? If no, do you wish to have someone hold your hand and guide you? If you have already started investing, do you want to learn how to invest better? If your answer to either question is yes, then carry on reading!
Today’s lesson will be on asset allocation and how it affects your investing decisions.
Quoted from Investopedia.com;
“Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over time.”
Very cheem (sophisticated) definition indeed! So, let me explain in layman terms.
Basically, in asset allocation, we are talking about a portfolio. Imagine you invest one-third of your money in stocks, one-third in bonds, and the rest you hold as cash. This means each asset class is split into 33% of the entire portfolio.
“Imagine a pizza cut into 3 big pieces. That is your asset allocation.”
Asset allocations will vary from person to person. There is perfectly nothing wrong with having a different asset allocation from others. There are financial gurus out there that swear by the 50-50, or even 20-80 bond-stock split. Meaning you invest 20% of your cash on bond and another 80% on stocks. However, my personal asset allocation is very different and it looks something more like this:
Green (Alternative investments such as P2P Lending)
What the? 75% on Bonds?
Yes, you saw it right. My current portfolio looks more like the reverse of the advice from financial gurus out there. In fact, this portfolio is more suited for older people who are nearer to retirement age. This is because a high allocation on bonds would guarantee a steady fixed income over the period of holding the bonds. An average bond gives out interest every 6 months in the form of coupon payment. This gives a form of financial security.
“Bonds are also usually considered a low to mid-risk investment.”
So, is SG Finance Guy a very old person? No lah, actually I am just turning 21 years old this year and definitely not close to retiring. However, as I said, an asset allocation is very personal to the individual. For myself, I share with you my story. I realised that I have to pay for my own tuition fee loans after I graduate from university which is around 5 years from now. Hence, it would be more reasonable to ‘park’ my money in low-risk bonds such as the Singapore Savings Bonds or even the recent Astrea IV Private Equity bond. The Astrea IV bond is quite good for me as it pays out 4.35% per annum.
“The scheduled recall date is five years from now, which is just in time for me to pay for my tuition fees loan.”
The next thing you have seen in my asset allocation is 9% for equities. So, even though I need to save up at least $40,000 in my bond category, I still purchase stocks whenever I have the spare cash to do so. For example, I utilise my own hybrid technique of “dollar cost averaging” and “lump sum investing” into the Nikko AM STI ETF through POSB. I find it quite a convenient way to invest in Singapore’s economy as I am just investing in the top 30 companies listed in the SGX, based on their market capitalisation. Meaning, the bigger the company valuation, the more the index manager buys of it.
However, as my intention is to ride out the daily/monthly price fluctuations and obtain real market gains in the long run, the investment horizon is quite far for me. Maybe around 5-15 years or more? Since my current focus is to clear my future liabilities (i.e university tuition fees loan) when the time comes, it makes sense for me to park my funds in bonds instead of equities. I can easily liquidate bonds. For example, the Singapore Savings Bond take roughly 1-2 months to get back my principal sum.
“Compared to selling away your stocks at the wrong timing or waiting for market to rebound which can take years, a five-years bond will guarantee yearly payouts with principal sum returned five years later”
Now you know why my bond-stock allocation is the other way round! Nothing wrong.
For the next allocation, it is called alternative investments. One example is P2P, which is also known as Peer-to-Peer lending. Many people do not consider it a form of investment, but rather a licensed money lending scheme.
“P2P allows businesses to obtain loans for expansion projects or for cashflow purposes while allowing retail investors to lend them loans.”
An average passive P2P investor can easily gain 10% or more annual returns but runs the risk of businesses defaulting on their loans. Sometimes, it may not be on purpose, sometimes it may be. Sometimes, businesses loan from P2P platforms in order to further secure bank loans. This may reduce their risk of defaulting as they are incentivised to pay back P2P platforms first since they tend to charge higher interest rates than banks. Still, P2P lending is risky and you can see why it is just a mere 5% in my asset allocation!
Lastly, let’s talk about cash.
“Cash is 11% of my portfolio.”
This is because there is always a need to have enough emergency funds to dip into when the need arises. Secondly, it is always nice to have some spare cash. This is so that you can easily purchase discounted/undervalued stocks whenever there is an opportunity to.
Lastly, as mentioned, asset allocation is very personal to an individual and it morphs with time. I know that my asset allocation will definitely change once I start working, and once I start buying a house or even a car.
“There is also nothing wrong with changing asset allocations so long as I am able to justify that change.“
I hope that by sharing with you my own asset allocation, you can make better investing decisions. So, share with me your own allocation, and explain why is it so?
That is all for my asset allocation sharing. I hope you enjoyed reading and do feel free to post me questions. It can be anything you would like to learn from a fellow investor. You can even ask technical questions like what are the merits of using “dollar cost averaging” compared to “lump sum investing” and I will be more than happy to answer! If not, see you on my subsequent posts which are a two-part series of “For Millennials, by Millennial” where I will be sharing more investment knowledge and fundamentals in a simple way that makes any young beginners understand right away!