Episode 8 - Asset allocation, why does it matter?

Does asset allocation really matter?

• Asset allocation is often hailed as the cornerstone of long-term investing. It involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one.
• There is even a widely cited statistic that asset allocation really drive 90% of your investment returns, or is that just a myth? Are 60/40 portfolios still the winning formula? The truth is that there’s no one-size-fits-all formula.

The role of asset-classes

• Asset classes are the ‘building blocks’ of your portfolio.
• Market conditions that favor one asset category may not be favorable for another asset category. By investing in more than one asset category, you could potentially reduce risk and better achieve your long-term financial goals.
• We need to understand the characteristics of each asset class before we work out the allocation.

Different types of asset-classes

• Stocks, or equities represent ownership in companies and are typically used for long-term capital growth. They may seem like the star strikers – dynamic with high-potential, but could be volatile. On the other hand, while bonds may offer relatively lower returns, they provide liquidity and potentially capital preservation – like steady defenders.
• Cash or cash-equivalents are the most liquid asset-class and typically provide little to no returns especially in inflationary periods. But they serve its importance by being extremely liquid to quickly move in and out of a market correction as well as a buffer during an emergency.
• There are also other types of asset-classes including commodities, precious metals, or even alternative asset-classes such as real estate, private equity, cryptocurrency, and derivatives.
• Due to unique characteristics of each asset class, different combinations of equities, bonds, and alternatives over time could have different degree of diversification and risk-return profile.
• For example, we can consider the historical performance of some asset classes, represented by indices below.

• An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the ups and downs of markets.
• Aggressive investors usually have a higher-risk tolerance. They are more likely to risk losing money in order to get better returns in the long run. A conservative investor, or one with a low-risk tolerance, might favor investments that are likely to preserve his or her original capital.
• For example, younger investors saving for retirement 30 years down the road might want a portfolio heavily weighted toward stocks because they believe it may provide greater long-term growth.
• But as you near retirement and then start living off your investments, you have less time to recoup losses if stock prices drop. Thus, you may decide to invest a greater percentage of your portfolio in bonds and cash.

How do investors build a portfolio

• Some investors prefer to do-it-yourself, picking individual stocks, bonds, or ETFs through a brokerage platform. There is full control over asset selection and allocation, and potentially lower fees if managed efficiently. However, this takes time and know-how.
• Others may go for the convenience of multi-asset funds. These professionally managed funds combine different asset classes into a single investment product, while being professionally managed, diversified, and regularly rebalanced. They’re a great option if you want a hands-off approach.

^ For illustrative purposes only. There is no guarantee the objective/target could be achieved.

Periodic review of your portfolio

• When your portfolio is up and running, it's important to conduct a periodic review. This will help you see clearly if your portfolio is still in line with your risk appetite and ultimate financial goals, and allow you to make changes to your investments accordingly.
• That includes considering how your life and financial needs have changed and whether it's time to adjust the weighting of your assets. For example, if a moderately aggressive portfolio racked up a lot of gains from stocks recently, you might move some of that profit into safer money market investments.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.