Starting an Investment Plan? (2)

Step 3: Agreeing on the Asset Allocation
Determining on the asset allocation is the foundation of my client’s investment plan. The 3 asset classes are Equities, Fixed Income and Money Market.
Equities are more risky but offers potential to get higher returns while Bonds are able to get reasonable returns with lower risk and money market are shorter duration bonds of as short as 1 year which are even more stable than normal bonds.

We’ll agree on the percentage band of equities in the portfolio depending on the client’s risk profile.
For example, Growth Portfolio (60% to 80% equities),
Aggressive (70% to 90% equities), etc.

I adopted some suggestions from Larry Swedroe’s book “What Wall Street Doesn’t Want You to Know” as a guide on the maximum equities allocation to be recommended on top of what my company suggested.

a) Investment Horizon ==> Maximum Equity Position
<3 yrs ="=""> 0% Equity
4-6 yrs ==> 30% Equity
7-10 yrs ==> 70% Equity
11-20 yrs ==> 90% Equity
>20 yrs ==> 100% Equity

b) Maximum Tolerable Loss ==> Maximum Equity Position
5% ==> 20% Equity
10% ==> 30% Equity
20% ==> 50% Equity
30% ==> 70% Equity
40% ==> 90% Equity
50% ==> 100% Equity

Step 4: Designing Core and Supplementary Portfolio
I’ll separate the Equities portion into Core and Supplementary Portfolio. The Core Equities position will mainly be global and regional diversified. The Supplementary portfolio will normally be more speculative such as single country, futures or sector funds such as technology and financials, etc. The rest will be in Fixed Income and Money market.

I believe in diversification with bias towards specific sectors or countries instead of diversification to the extent that I’m forming a fund for global equities or global balanced fund.100% of my clients are managed via a portfolio manner.

Example of a Core and Supplementary Portfolio

Core Funds
Global Equity - 20%
Global Resource Equity - 10%
Asia Ex-Japan Equity - 30%

Supplementary
BRIC Equity - 10%
Asia Financial Equity - 10%

Fixed Income
Global Corporate Bond - 10%
Singapore Money Market - 10%

There are so far none of my client whose money are parked in just 1 or 2 funds other than those under RSP (Regular Savings Plan).

(To be continued...)