Asset Allocation

How to allocate your asset for the best return in the market? This post will guide you step by step on how to allocate your asset so that you would win the race of investing in the long run.

Asset Allocation for Malaysians/Singaporeans

As for Malaysians, there are a few options available for you to invest- unit trusts( mutual fund), ASB( Amanah Saham Bumiputera)/ASN ( Amanah Saham Nasional), Malaysians stocks( Bursa Malaysia) , EPFs ( Employees Provident Fund), etc.

I have tried many years in investing in Malaysian stocks- bank, REITs, gaming stocks, etc, the return was pathetic. You are likely to lose your money in the long run. I have lost my faith in Malaysian stocks long ago and I never looked back again.

I am proposing all Malaysians to put half of their investment savings in just EPF or ASN/ASB and the rest goes to US/World ETFs/Index funds. The reasons are quite simple,

1. EPF and Permodalan Nasional Berhad which is running ASB/ASN are the among two largest fund managers investing in the Malaysian stock market. They are the big boys, why bother to invest yourself in Malaysian Stocks? Maximize your contribution to EPF and ASB/ASN and forget about the Malaysian market! You will never win in the Malaysian stock market except for a few lucky ones.
2. Malaysian ringgit ( MYR) is the currency that makes many Malaysians heartache! Our currency is so weak and I think it is time for you to diversify into another currency- either USD or SGD is a good choice.

A mixture of stocks and bonds

As for Singaporeans and other Asians especially investors from Hong Kong, you might have higher chances of winning in your country stock market. Anyhow, I still recommend Singaporeans to maximize their CPF contributions and/or build a portfolio of STI ETFs /REIT ETFs and bond ETFs.

Your other half portion of the fund should go to US ETFs/Index Fund for Malaysians as well as Singaporeans. This one is going to make a lot of money for you if you hold them for the long term.

You are going to love ETFs/Index fund because the price only has one way to go in the long term- UP! You are going to save a lot of money because the total expense ratio ( TER) for these funds is usually less than 0.1-0.2% as compared to buying unit trusts that have charges ranging from 1.5-2%.

The final and most important beauty of the ETFs/Index Fund is it will never go down to ZERO unless all companies in your index fund go bankrupt together! The chances are slim so let reassured that you would sleep well forever after this.

Picking your Portfolio Allocation

As you know- you need to allocate a mixture of equities ( stocks) and bonds. Depending on what is your time horizon and risk appetite, you have to decide how many percentages you want to put in each asset.

This is an efficient frontier graph of US total stock and total bond market. The idea was first introduced by Harry Markowitz in 1952. Depending on how many percentages you put in the US stock market and the Total bond market, the rate of return and fluctuation of price differs. The more you put in equities, you get the higher return ( Y-axis) but you are going to see the wild swing of prices ( X-axis- standard deviation means volatility!) You can see my asset allocation HERE!

So, how do you decide- a mixture of 90% equities, 10% bonds, 50% each, 10% equities, 90% bonds? There are three important factors you have to look at,

1) Your Time Horizon

If you think you are going to have active income ( cash flow) for many years to come and you only plan to retire after 10-15 years later, you should at least allocate 70% of your portfolio to equities! Another useful way to calculate the percentage of your age equals the percentage of your bond portfolio. Let’s say you are 40+ years old, you should allocate 40 % into bonds.

But I find this too conservative because by holding a large portion of your portfolio in bonds, you are going to get less return in the long term. I prefer the idea of subtracting your age by 10-20 to be your percentage of bonds holding. So if you are 40+ years old, put 20-30 percent in bonds and the remaining money in equities.

2) Your Risk Appetite

Can you sleep well at night if your portfolio drops more than 30 percent in value overnight? This is the most crucial question you need to ask yourself before fixing up your asset allocation. You are young and only 25 years old, if you choose the approach I mentioned above, you will be allocating 90% ( or even 100%) in equities and 10% ( or zero percent) in bonds. During the euphoric bull market, you are elated and manic but come the bear market, you might be having insomnia and suicidal thought.

AND trust me! This happened to me and many investors out there many times before! If you think you can’t take the stress of losing 30-40% of your portfolio value overnight, you need to adjust your asset allocation.

3) Your Job /Health Status and Emergency Saving Fund

If you have a job that is secured such as professionals, government servants, and military. And you have enough medical insurance coverage and emergency fund kept aside, then you might want to put more percentage into equities. The worst scenario that can happen to any investor will be losing a job during market sell down. You might need to sell a portion of your portfolio if you lose a job, get sick, and during emergencies. Therefore make sure you have all these emergencies covered before even thinking about investing! Remember, you should hold this portfolio for life and I mean it- FOREVER and DO NOT SELL. Only take out your dividend or 3-4% per year of your portfolio after retirement!

So what do I do for my asset allocation? For my USD portfolio, I put 85% in equities ETFs and 15% in bonds ETFs. There is no fixed rule for this. If you think you are young and your heart can take it by looking at a market correction of more than 30-50%, you can go for the 100% equities allocation.

But as you are moving to your goal of Financial Independence and Retirement, you might want to slowly move more proportion of your asset to bonds. I would suggest you start doing this portfolio re-balancing ( changing your asset allocation percentage) 3-5 years before retirement.