“Despite what many people think, one of the most important investment decisions you can make is not what particular stocks or securities you buy, but how you allocate your
investable funds to the various asset classes.”

I was intrigued when I first came across the above statement. While asset allocation has been on my mind, it has never come across as important and hence I have never put down in writing.

So why now?

I am a few years into my 40s and I can sense that I am getting more sensitive the systematic risk of stock market underperformance for a long period of time. This is due primarily to my larger portfolio as compared to a decade ago, hence the same percentage drop is going to be more painful now than before. Also, my time to recovery from a market crash will get lesser each year.

With my review of my goal and strategy in 2015, and rebuilding my portfolio in the last 2 years, I think it is now an appropriate time to put this down in writing. This will add another dimension in my approach and guide me as I work towards improving or just sustaining my performance.

In general, asset is classified into four categories – cash, bond, properties and stock. In the past 17 years, I have primarily focused on cash and stock. Moving forward, it should still be the same. 

I am not looking into property investment as I am wary on holding large debt that required high amount of monthly payment,  Of course one can argue that the rental should cover should cover the monthly loan and we just need to wait for the next upturn in property market for capital appreciation. However, as this is not my area of competency and I am currently not that incline to learn about it, I would give it a miss.

Also, I am not into bond due to personal preference on stable dividend stock. Having said that, this is not a never never.  I am probably going into SSB soon (though I feel like it’s more of a FD nature), and in a few years time if my asset grew larger (and I am older), I might allocate some into bond.
Screen Shot 2017-12-02 at 10.24.26 PMHence, the allocation exercise for the moment will simply between cash and stock. Having two young kids, I decided that at least I must have two years of reduced expenses as emergency fund.  Also, knowing that I have a moderate risk appetite and my interest in stock investing, I am going for a 30% cash – 70% stock allocation from now till I am 50. Will do a review at 50, to see if there is a need to change the allocation.

Combining the above, it means that at any one time, I would have at least 2 years of reduced expenses or 30% cash whichever is higher.  This provides a form of security which allows me to invest the rest without worrying too much about market performance. In the sense that if market continues to do well, my 70% will ride the bull. On the other hand, if the market crashes for one reason or another, the cash beyond the emergency fund will provide me an opportunity to buy into the good counters at a temporary depressed price.

Finally, this asset allocation will be checked and balanced bi-annually.