How to Start Investing – Deciding on an Asset Allocation

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

-Paul Samuelson

I start with this quote because I don’t have get-rich-quick tips nor stock recommendations that’d multiply your money quickly; this article is on how to approach investing over a long term horizon in a manner that suits your risk appetite.

Before looking for products to buy, you first have to decide on your asset allocation.

What asset classes are there?

Stocks
Also known as equities, this asset class is typically of a higher risk with greater potential returns. When you own stock of a company, your stock price fluctuates with market forces as well as the business performance of the company.

When the company does well, prices of the stock tend to go up and the inverse is obviously true. If the company goes bankrupt, its assets are liquidated to pay off its debts and liabilities, and stock owners are paid last, if there is anything left to pay.

Bonds
When you buy a company’s bond, you are essentially loaning them money, and they pay you interest periodically. After a certain time period, they would have to pay you back the principal. As such, bonds are generally of a lower risk than stocks, and tend to have an inverse relationship with stocks.

Property
Singapore’s favourite investment asset class, property needs little introduction. Property can be bought and sold for profit, and also generate rental yield for its owner.

Alternative and others
In this class is gold, oil, Bitcoin, private equity… among an endless list of things people try to squeeze returns out of.

Deciding on an asset allocation

For a start, we can simplify our asset allocation to be between stocks and bonds. Anyway, exposure to assets like gold and property is achieved when you purchase stocks of gold mining companies, and REITs (real-estate investment trusts).

To decide on your asset allocation, you need to know two things: 1) how long you can remain invested; 2) what is your risk appetite.

Aggressive Portfolio
Equities are volatile, but is assumed to perform better than bonds in the long run, and this has been the case historically. The rule of thumb is: the longer your time horizon and bigger your risk appetite, the bigger your exposure to equities should be. An aggressive portfolio will have as much as 80%, or even more, in equities.

The Rule of 100 specifies that your exposure to equities should be your age subtracted from the number 100. For instance, if you’re 25, you should have 75% vested in equities. Some have even called for the Rule of 100 to be the Rule of 120 instead.

Balanced Portfolio
If you’re of a balanced risk appetite, neither too risk averse nor too adventurous, you may consider a portfolio that is split 50-50 between equities and bonds. I would suggest at least 60-40 in favour of equities if you’re relatively young.

Conservative Portfolio
Obviously, a conservative portfolio would be more heavily focused on bonds, to the tune of 30-70 in favour of lower risk assets. Arguably, this is taking too little risk, but if your time horizon is relatively short, this is the safer option to go with.

Executing your portfolio

Once you have decided on your portfolio and you have built up your emergency cash reserves, it is time to find investments to fit into your asset allocation. Review your existing investments first – if you’re a balanced investor but have 100% in equities, you would want to then channel your monthly savings towards bonds until you reach a more balanced split.

Periodically, you should also review your portfolio. If you’re supposed to have a 50-50 split, but your equities have outperformed thus making your portfolio look more 65-35, you would start to liquidate equities to buy more bonds. This is called rebalancing, which makes sure that your risk exposure is at your intended level, and also to take profit on assets that are doing well in a disciplined manner.

Reviews of specific products, and more specifics

Once your asset allocation is decided, you would then need to purchase specific products to execute it. There are a plethora of investment products that you can take up, and I intend to review products as I continue writing here.

Also, I foresee this being part of a much larger series of personal finance guides for young working adults. Subscribe to my Telegram channel to receive updates!

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