Lately, I read some materials on asset allocation. As I reflect, while I agree on its principles and virtues, I’m also in the opinion that it might not be suitable for all people. This is because I think that the impact of asset allocation onto one’s net worth differs from one individual to another. Thus, in this write-up, I’ll share my thoughts on asset allocation so that you could decide if this is helpful in shaping and building your own financial future.
#1: Why Asset Allocation?
Presently, I would say that I had accumulated some experiences as an investor. I have some notable buys such as DBS and MLT. But along the way, I invested in a couple of stocks such as Ping An and YTL REIT, which are in capital loss positions today. I continued to receive dividends from all stocks that I own today but they are at the expense of market volatility due to multiple unforeseen events which include COVID-19 and the ongoing war between Ukraine and Russia.
This means, while I have made all considerations possible to buy fundamentally solid stocks at attractive valuations, stock prices could go anywhere in the short term. Hence, this is where asset allocation comes in. It helps stock investors like me to be less impacted by a 30%, 40%, 50%, or more stock price fall on my own net worth and thus, becoming more financially ‘unbreakable’.
#2: What Are the Key Assets Involved?
Here, I would touch on four main assets that we can use to do asset allocation:
This includes savings accounts, FDs, and digital cash management platforms like KDI Save. Some view cash as trash as they yield little interests to depositors. For me as a long-term investor, I think cash is important because it would enable us to keep our investments without selling them off to finance an immediate need due to unforeseen circumstances.
Stock investing is about accumulation of shares of businesses for the long-term. As investors, we would expect capital appreciation if the businesses continue to grow, expand, and mature over time. Of course, we would receive dividends for holding onto these stocks along the way. With that being said, I would say that I have attained better yields and capital gains over time as I improved my craft as an investor. This takes time and many reflections on past investment losses that I incurred along the way.
As I write, EPF has RM 1+ trillion in assets, comprising fixed income instruments (bonds), equities and real estate. EPF is suitable for people who understand the value of diversifying a portion of their wealth into a fund which offers dividends annually without market volatility. Obviously for EPF, we do not have the liberty to use all our dividends as they would be retained until we meet the criterias of withdrawal set by the EPF.
4. Real Estate
For most, real estate is a leveraged investment that can build one’s net worth in the long run. Along the way, landlords could earn rental income, which is useful in paying off their mortgage interests. Like all investments, the key to success in property investing lies in knowing its fundamentals and asset valuation. Both of them are important, because if one buys a property without them, he is putting himself at risk of losing up to 6-figures of net worth from it.
#3: Who Is It Not Suitable For?
Personally, I find that asset allocation is more practical to people who have built up at least 6-figures in net worth and appreciate the virtues of diversification of their own personal wealth to become financially unbreakable. Hence, if you are currently on route to reaching your first RM 100,000, I believe it could be better for you to focus on raising income and attaining a higher savings rate to quicken your journey towards that magical RM 100,000.
#4: How Not to Do Asset Allocation?
Inspired by a quote by Warren Buffett, diversification is not a protection against ignorance. I believe if one chooses to allocate his wealth into stocks, properties, and other asset classes, he has to be educated in all of the investment assets to make wiser investment decisions in them all.
In other words, if you have a short-term gambling mindset, you could speculate stocks, flip real estates and buy Bitcoins without a care of their fundamentals or valuation. You could call this ‘asset allocation’. But, the major question is, ‘What good will it do to your net worth if you have lousy stocks, overpriced properties and some ‘investments’ that have no intrinsic value in your portfolio?’
As such, I believe asset allocation is more effective if you build a portfolio which consists of the best stocks and properties in terms of their fundamentals, which are bought at discounted prices. Also, you can include cash for liquidity and EPF to ‘blindly diversify’ but to consider the asset’s fundamentals, when doing asset allocation.
#5: How Do I Allocate My Assets?
I would say that I’m a work-in-progress when it comes to asset allocation.
At this stage, my net worth allocation is likened to a Mercedes Benz logo, which consists of three almost identical parts: stocks, real estates, and cash (FDs). This allocation offers a balance in leverage, growth, income and liquidity. Personally, I would take that as a positive as my objective is to be financially unbreakable.
Of course, the drawback for this allocation is that – ‘It is not spectacular’. Here, I would not enjoy a wild increase in net worth, as compared to one that has a big portion of his wealth solely on one asset class. For instance, if a person has 90% of his wealth in Bitcoin and it doubles in price, his net worth will rise a lot faster than mine. Obviously, if it crashes, his plunge in net worth shall be greater too.
As such, here is the thing about asset allocation:
If you want to be financially unbreakable, you can consider asset allocation.
If you want to be financially spectacular, you may consider otherwise.
Moving forward, I wouldn’t say that I could keep my net worth allocation at this current shape. This is because I believe my allocation could change over time as my investment preferences could be adjusted depending on my goals in life. So, I think it is better to find out what you wish to accomplish in your life first, prior to investing your money. It does not make sense to model my style of allocation if you have different life goals, beliefs, and characters from mine.
All in all, I find that investing is not so much to get wealthy but an art that could allow us to stay wealthy. From my write-up above, I hope that you had gained a better idea or an inspiration to manage your wealth better. Of course, if you are one who wishes to stay financially unbreakable, you can start by assessing what and how you invest today and chart a course to stay wealthy in the future.
That is it for now. I wish that you enjoyed my take on asset allocation.
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