How To Mix Up Your Investment Portfolio

Foreword from ShareInvestor

This article “How To Mix Up Your Investment Portfolio” by Lorna Tan was first published in The Straits Times on 07 Jan 2018 and is reproduced in this blog in its entirety.

The bumper returns investors enjoyed in 2017 are unlikely to be repeated on that scale this year so a well-diversified portfolio that covers all the bases is essential, say financial experts.

While the global economy looks rather positive, retail investors should not get carried away and throw caution to the wind.

Instead, aim for investments that are steady and offer decent risk-adjusted returns, advises Mr Vasu Menon, vice-president and senior investment strategist at OCBC Bank.

He adds that irrespective of how much you have to invest, stay diversified across asset classes, geographies and even sectors, and do not take concentrated bets in specific stocks and industries.

Mr Brandon Lam, Singapore head of financial planning group at DBS Bank, says savings should not be invested in just one asset class – shares, bonds or fixed deposits – but a mix of those.

“Unit trusts can provide such diversification and come with active management of risks and opportunities by fund managers,” says Mr Lam.

Mr Daryl Liew, head of portfolio management at Reyl Singapore, notes that despite the negative outlook for bonds, investors should still hold some in their portfolios, with a preference towards shorter duration and inflation protected securities.

Mr Ho Song Hui, Fundsupermart’s assistant director of research and portfolio management, prefers the “safer segments” of fixed income, such as short-duration bonds, over high-yield and emerging-market debt securities due to low-risk premiums and the likelihood of rising interest rates”.

Investors should also allocate more in attractive share market regions such as Asian and emerging markets, while choosing more defensively oriented products for their Western developed market exposure, given the expensive valuations of American and European equities, he adds.

When allocating assets in a portfolio, Mr Menon suggests considering factors such as risk appetite, financial circumstances and objectives. Investors who are not sure how to allocate their cash should ask a financial adviser.

Mr Sam Phoen, co-founder of Wateram Capital, says the more investable sums you have, the more asset classes you can choose but he warns investors of “over-diversification” as that would incur disproportionately high transaction costs.

As timing the market is difficult, invest regularly, says Mr Lam. This means spreading out your investments on a monthly basis, for instance, by investing through regular saving plans instead of chasing highs and lows.

“Such plans help retail investors invest in a disciplined manner and offer a wide range of products from a minimum monthly investment of $100 a month,” notes Mr Lam.

He adds that investors should also review their risk appetite and investment time horizon. So if you are willing to invest for longer and are prepared to take on higher risk, consider putting a higher proportion in equities or equity funds that potentially offer better returns over time.

Here are some ideas for those with investable amounts of:

$20,000 To $50,000

Mr Menon says that if you have a “fairly strong risk appetite”, you can consider a portfolio of unit trusts that invests mostly in equities. However, don’t ignore unit trusts that also offer exposure to bonds and other income-yielding assets.

Mr Phoen recommends investing in a maximum of five stocks, or in two to three exchange-traded funds (ETFs). In addition, he suggests investing in two retail bonds.

Investors may also consider the risk-free and capital-guaranteed Singapore Savings Bonds (SSBs) and holding them for up to two years if you are risk-averse or think bond prices are too high. After all, you could sell SSBs at any time without suffering any principal loss, which makes it easy to switch to buy another bond when the yield is higher, he adds.

$100,000 To $200,000

For those with a strong risk appetite, consider individual stocks and retail bonds. However, most should still be invested in a portfolio of unit trusts that invests in equities, bonds and income-yielding assets, says Mr Menon.

Mr Phoen suggests investing in a mix of up to 12 stocks and ETFs. For bonds, invest in up to four retail bonds and SSBs.

$500,000

Mr Phoen recommends a mix of up to 20 stocks and ETFs, based on different investment themes. Be mindful not to lose focus by having too many stocks to track closely.

Invest in up to six retail bonds, bond ETFs and SSBs. You may also consider alternative investments in gold, venture capital and real estate. For Singapore private residential properties, it is only suitable for investors with at least a four-year investment horizon, he advises.

Mr Menon says that if you have a good risk appetite, consider a wider selection of stocks and bonds as well as unit trusts that invest in equities, bonds and income-yielding assets.

“Staying diversified may not be as exciting as taking concentrated bets into, say, technology stocks like Tencent and Alibaba. However, there is no free lunch and these multi-baggers come with much greater risk and volatility. Over-investing into these stock market darlings may not be the most prudent long-term strategy.”