When it comes to asset allocation, there’s no one-size-fits-all solution.
Asset allocation should depend on factors such as age, income, risk tolerance, financial needs and goals.
However, here are some general rules that you can follow when deciding how to manage your stock portfolio.
Rule #1: Prepare an emergency fund
Although all the rules I will list here are going to be important, this is perhaps the most important of all.
The last thing you want is to be forced to liquidate your stocks during a market downturn and incur a loss on your investment.
In fact, I think it may be prudent to be a bit more conservative than that and have at least one year’s worth of expenses in cash.
Your emergency stash should be held in cash, preferably in a bank account that can be accessed quickly and easily.
By parking your cash in a savings account, you will also manage to earn some interest.
Rule #2: Money that you need over the medium-term should be held in safe, less volatile assets
For money you need in the next three to five years, you would not want to deploy it in volatile assets.
This portion of your savings should be held in safe assets such as government or high-quality corporate bonds and/or fixed deposits.
Singapore’s stock exchange has more than a few listed corporate bonds that investors can take a closer look at.
The advantage of bonds is that you can hold them to maturity without worrying about fluctuations in the bond price.
You can also choose bonds that have a maturity that suit your investment time-frame.
You should not be investing this portion of your portfolio in stocks as they may be quite volatile.
Ideally, your investment horizon for stocks should be longer than five years.
Rule #3: Money you don’t need for more than five years can (and should) be invested in stocks
The last segment of money is the amount that you won’t need for more than five years.
This money is the perfect candidate for allocation to shares.
Even if you are a retiree, a portion of your wealth should be invested for the long-term.
That’s because the life expectancy of Singaporeans has increased substantially.
A 65-year old retiree in 2021 is expected to live for another 19 years.
Stocks have historically outperformed all asset classes over a long time frame.
According to Jeremy Siegel’s book, Stocks for the Long Run, stocks beat bonds 71% of the time in rolling five-year periods, 80% of the time in rolling 10-year periods and 100% of the time in rolling 30-year periods.
The same logic applies to the Straits Times Index (SGX: ^STI) here in Singapore, too.
Over any 20-year period since inception, the odds of making a loss drops to zero when investing in the index, for example through an ETF.
That just goes to show that a so-called “risky asset” has very limited risk if held over the long-term.
Armed with attractive dividends and long-term capital gains, stocks make the perfect investment over the long term.
Get Smart: Asset allocation is an important skill
Asset allocation is one of the first decisions to make when building a portfolio that suits your needs and goals.
In a nutshell, when you need the money dictates where you should park it.
Money that you need in the near to mid-term should be held as cash and in safe assets, respectively.
On the other hand, money that is not needed over the next five years is a great candidate for the stock market.
Shares of great businesses, when held over the long-term, tend to outperform other asset classes over a longer time frame.
If you could only buy one of these dividend stocks in August, which would you pick?
The pandemic survivor, Keppel DC REIT (SGX: AJBU)..
The property mogul, Frasers Logistics & Commercial Trust (SGX: BUOU)…
Or the blue chip darling, DBS (SGX: D05)?
This is the challenge we created for ourselves this month.
We asked the public to choose 3 stocks for us.
And we will be buying one of them.
Now, it might sound crazy to stake our money on the public’s opinion. But we’ve done our homework.
And on 29 of July, you’ll be able to watch our analyses live on a webinar.
We’ll break down each stock’s strengths, weaknesses, and potential to add thousands of dollars in our accounts.
We’ve never done this before, so you’re in for a treat. If you have any interest in dividend stocks, this webinar is for you.
Disclaimer: Royston Yang does not own shares in any of the companies mentioned.