In today’s volatile market, having a diverse investment portfolio is essential to minimise risk and potentially maximise returns. This strategy is known as asset allocation, which involves dividing investments among various classes of assets such as stocks, bonds, and cash. While traditional asset allocation has been the go-to approach for many investors, advanced asset allocation strategies are gaining popularity due to their ability to adapt to changing market conditions.
This article will discuss advanced asset allocation with saving plans that can help you diversify your portfolio in Singapore.
Understand the basics of asset allocation
Asset allocation is a fundamental concept in investing that involves spreading your investment portfolio across different asset classes. The primary purpose of asset allocation is to minimise risk and potentially maximise returns by diversifying investments. This approach recognises that other asset classes perform differently under various market conditions, and having a diverse mix can help balance out losses in one area with gains in another.
Traditionally, investors have used a simple rule of thumb to determine asset allocation based on age. The percentage of stocks in the portfolio should be equal to 100 minus your age, with the rest divided between bonds and cash. However, this one-size-fits-all approach may only suit some as it doesn’t consider individual risk tolerance and financial goals.
Investors seeking a more advanced asset allocation approach can use Modern Portfolio Theory (MPT). MPT takes into account not only risk tolerance but also correlations between different assets to create an efficient portfolio. This strategy aims to potentially maximise returns for a given level of risk, known as the ‘efficient frontier.’
Incorporate savings plans into your asset allocation
Savings plans are perfect for long-term investors looking to diversify their portfolios in Singapore. A savings plan is a regular investment scheme that allows you to invest a fixed amount at specific monthly intervals. This approach eliminates the need for lump-sum investments and helps smooth market volatility.
To incorporate savings plans into your asset allocation strategy, you can consider different savings plans, such as endowment plans, Regular Savings Plans (RSPs), and Supplementary Retirement Schemes (SRS). Each has unique features and benefits, making evaluating your financial goals and risk tolerance essential before choosing one.
Endowment plans are life insurance policies that offer both savings and protection benefits. They provide stable returns over a fixed period, making them suitable for risk-averse investors. On the other hand, RSPs are investment-linked plans that allow you to invest in various funds while providing life insurance coverage. These plans offer flexibility in contribution amount and frequency, making them ideal for investors looking to build their portfolios gradually.
SRS is a government scheme designed to encourage long-term savings for retirement. It offers tax benefits, making it an attractive option for high-income earners in Singapore. You can invest your SRS savings in various financial instruments such as stocks, ETFs, and fixed deposits.
Consider alternative investments
Alternative investments can also be crucial in advanced asset allocation besides traditional asset classes like stocks and bonds. These include real estate, commodities, private equity, and hedge funds.
Real estate is a popular alternative investment that can provide stable returns and diversify your portfolio beyond traditional assets. However, it requires significant capital and carries risks like vacancy rates and property market fluctuations. Commodities like gold and oil are also considered alternative investments due to their low correlation with traditional assets and ability to hedge against inflation.
Private equity and hedge funds suit sophisticated investors looking for higher-risk, higher-reward options. These investments involve pooling money from multiple sources to invest in private companies or alternative financial instruments.
Monitor and rebalance your portfolio regularly
Even with a well-diversified and advanced asset allocation strategy, regularly monitoring and rebalancing your portfolio is crucial. Market conditions can change quickly, affecting the performance of different assets in your portfolio. Rebalancing involves adjusting the percentages allocated to each asset class to maintain your desired asset allocation mix.
Several ways to monitor your portfolio include reviewing your asset allocation mix, tracking individual investments’ performance, and assessing ongoing market conditions. Consider using a financial advisor or online tools to help you monitor and rebalance your portfolio effectively.
Investors should also regularly review their financial goals and risk tolerance to ensure their asset allocation strategy aligns with these factors. For example, as you get closer to retirement, reduce your exposure to riskier assets and shift towards more stable investments.
Be mindful of costs and fees
When creating an advanced asset allocation strategy with saving plans, it is essential to consider costs and fees. These can eat into your investment returns, reducing the overall effectiveness of your asset allocation.
Savings plans often come with sales charges, annual management fees, and policy administration charges. Understanding and comparing these costs among different providers is crucial to finding a plan that offers the best value for money.
Investors should also consider the costs associated with alternative investments, such as private equity and hedge funds. These typically have higher fees than traditional assets, making it crucial to evaluate their potential returns before investing carefully.