Asset allocation – the right investment mix

Standard Chartered Bank

Asset allocation is one common factor that affects all investments and has historically proven to be the single most important factor in successful investing. It is the process of developing a diversified investment portfolio by allotting investments across the board, into different asset classes in varying proportions to maximise returns and minimise losses. The deciding factors that determine where and how much, are an individual’s goals, time horizon, risk tolerance and financial situation.

Before one ventures into an elaborate investment plan and asset allocation techniques, there are some matters that need to be looked into.

The words ‘saving’ and ‘investing’ are often used interchangeably, but there are key differences between the two and one should not be overshadowed by the other.

It is absolutely vital to first have a sizeable emergency fund that is able to support current lifestyles for up to six months. Once an emergency fund is set, investments can be made with both long and short term goals in mind.

Generally, any investment with a time horizon of below five years is considered to be short-term. Individuals in their 20s and 30s have the advantage of a lengthy investment horizon and thus, a far better chance of achieving all their goals if they start early.

Having a strategy and adhering to it can make a substantial difference in the success of an investment plan. Your personal asset allocation strategy is probably the most important element in your investment plan.

Investment portfolios should be custom designed to suit each individual’s needs. A secure investor might opt for a 50/50 ratio, with 50 per cent in bonds and 50 per cent in cash, a conservative investor may opt for a 15/85 ratio with 15 per cent in equities and 85 per cent in bonds while a balanced investor may opt for a 30/70 ratio with 30 per cent in equities and 70 per cent in bonds. A growth and aggressive investor may prefer a 60/40 and 80/20 ratio respectively, in equities and bonds.

The right investment mix can impact the performance of your portfolio and ability to meet your financial goals. Higher potential gains in investments usually equal a higher risk. That’s why it is best to assume a level of risk with which you are comfortable.

A well-diversified portfolio is recommended because it has the ability to provide a cushion for the more volatile segments of an investment. Analysis of historical returns has revealed that the longer you hold higher risk growth investments in your portfolio, the more likely you are to emerge profiting from it. As a long-term investor, it is important to allocate assets in a way that allows you to ride out the low periods.

Good asset allocation can help make provisions for three basic goals most people have – purchase of a home, higher education of children and a retirement plan.

Apart from the security of having your own home, the fact that your money is far better used when paid towards your own property than rental, makes property purchase a logical step to take. With the appreciation in value, especially if purchased during market downtrends, your investment can work for you in more ways than one.

An overseas education for children would definitely take a chunk out of your income in cash savings. This phase of life can be planned for through strategic investments while children are young. With the right asset allocation, a lengthy timeframe and regular steady growth, exorbitant university fees have the potential of being paid off with just your initial investment and the compounded dividends that are reinvested.

With increased globalisation and a dramatic change in the attitudes and lifestyles of youth today, it may come as a shock for senior citizens to accept having to continue to support themselves and to live alone in their golden years. It is therefore, highly recommended that an adequate retirement plan be set in place.

The decision on making strategic asset allocation is important and many investors prefer to rely on the guidance of a personal financial consultant to give them the benefit of professional expertise.

Changes in life will impact the investment plan. A good investment plan has the ability to adapt to these changes and your changing needs. A person’s goals, timeframe and financial situation changes over the years and the asset allocation plan should be able to shift accordingly.

A personal financial consultant will periodically check if your goals and financial situation have changed and if so, help make the necessary readjustments to your portfolio.

An overwhelming determinant of the success or failure of an investment is the right investment mix. Equipped with financial literacy, accurate guidance, a strategic asset allocation plan and prompt action, you as an investor, can ensure that you remain on track and manage to achieve all your investment goals.

This article is for general information purposes only and while the information in it is believed to be reliable, it has not been independently verified by us. You are advised to exercise your own independent judgement with the contents in this article and seek the advice of your professional advisers if necessary.