Good day!
In the past two weeks since I last posted, stock markets around the developed world have taken a nice tumble. Probably a confluence of many factors such as the ending of QE3, uncertainty over US interest rate hikes, general Eurozone economic weakness, the spread of the Ebola virus, falling oil prices, so on and so forth. I will be posting an update on my holdings soon, but for today I shall touch a little on personal asset allocation.
A large portion of my stock portfolio has been battered down by the markets over the past couple of weeks, and will probably continue to do so. At this point, some may have decided to cut their losses and sell, or lock in whatever profits they might still have leftover.
For myself, I've not sold anything, and also have been able to deploy some (but not all) of the spare cash which I have left over to buy some stocks at a better bargain. Some additional holdings I acquired was SembCorp Industries locally, and on the London Stock Exchange, more Royal Dutch Shell 'B' shares, as they have dipped quite a bit due to the fall in oil prices, as well as Royal Mail.
Ultimately, what each investor does in a market downturn depends on his overall strategy. I believe that asset allocation matters a lot more than actual stock-picking. There are many schools of thought in the realm of personal finance on which asset allocation strategy gives you the most return while minimizing risk. There is the traditional "100 minus your age in stocks, and the rest in bonds". For my case, it would mean 75% in stocks, and 25% in bonds, and rebalance periodically but not too often. There is also the permanent portfolio, where you have 25% of stocks, bonds, gold, and cash or cash equivalents (such as money market funds), and rebalance periodically once again. Exposure to each asset class could either be from ETFs, or individual stocks and bonds, and physical gold.
The main idea is to have a good balance of asset classes which are as uncorrelated to each other as possible, so in the process of rebalancing, force the individual to sell high and buy low.
Personally, I do not follow either of these methods. My personal goal in investing is primarily sustainable income replacement (reasons as mentioned in the About page), and the primary instruments are dividend-paying stocks. I do intend to dabble a little in bonds when the yield on 10-year Singapore Government Bonds goes above 3% though.
My asset allocation is pretty straightforward:
- Though not really part of the overall asset allocation, it is critical to ensure that you have adequate insurance coverage. Personally, I have an NTUC Enhanced IncomeShield with the assist rider for my medical cover, SAF-Aviva Term Insurance with Critical Illness as well as Early Critical Illness riders.
- An emergency fund of 6 months worth of current expenses. This amounts to around $20k
- Cash which I require for near-term expenses (within the next 5 years). As of now, I am saving up for my next car in 2016 when my current COE expires, and I hope to get it without taking on a loan. As of now, this cash is rolled over in fixed deposits. Until now, I have been pretty fortunate to be able to get >1% p.a on these deposits due to bank promotions. Currently amounts to $45k, and hope to hit $80k by early 2016 to be able to get a decent 2nd-hand car without a loan.
- Cash for daily expenses as well as a "war-chest" for investing. This is crucial especially for market downturns, as it allows you to buy great companies at good prices when opportunities arise. Value typically fluctuates, the first couple of thousand for very near term expenses. More if vacations or other big-ticket items need to be bought.The rest of it depends on the amount of bargains available in the market. Over the past few months, stocks have been pretty expensive, hence I was able to save up more cash for times like this. Currently amounts to $15k.
- Stocks. Primary source of alternative income. Ballpark valuation of my equity portfolio now would be ~$115k for my local stocks, and ~$13k in US/UK stocks, no leverage. If you have been following my previous posts, majority of these stocks are large-cap dividend paying blue chips, which provide a greater degree of stability (though of course, being equities, are risky).
I think one of the more important points of allocation which reduces the impact of market downturns would be simply not investing cash which you require in the near future, as well as always having spare cash to take advantages of lower stock prices.
Until next time!
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