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Idea of the Week: Is Your Portfolio Perfect? [21 Oct 2011] October 21, 2011
Many have embarked on the endless pursuit for the perfect portfolio; we offer some of our own portfolio construction guidelines in this week’s “Idea of the Week” segment
Author : Fundsupermart


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For decades, financial industry experts have debated long and hard about what makes the perfect portfolio. The endless pursuit for the perfect portfolio has spawned innovations ranging from portfolio insurance strategies (one of the commonly-cited factors in the 1987 stock market crash) to the inclusion of alternative assets like real estate and commodities, and more recently, the implementation of derivatives. Ultimately, even after years of experimentation (and much blood, sweat and tears), many come to the realisation that the search for the perfect portfolio is really an “endless” one.

At Fundsupermart.com, we prefer not to dabble in pipe dreams, not least when it involves one’s personal finances. To us, there exists no “perfect portfolio” but rather, a series of useful (and logical) guidelines to follow which should allow the construction of a portfolio commensurate with the levels of risk and expected returns the investor desires. Such a portfolio would not profess to beat the returns of all other investments over any given period, nor would it claim to be able to sail through any given crisis with nary a scratch. Rather, a portfolio constructed on these guidelines offers a disciplined, logical approach to investing, with enough flexibility to respond to changes in the investment landscape, but also sufficiently passive in its approach to allow one to avoid sleepless nights spent worrying about one’s investments. That being said, we present some basic steps when formulating an investment portfolio:

  1. Select a Suitable Asset Allocation
  • Two major asset classes – equities and bonds - form our universe of investment assets; bonds provide stability with lower expected returns while equities provide stronger returns with higher volatility
  • The allocation between equities and bonds is determined by the investor’s willingness and ability to take on investment risk, which encompasses a careful study of factors like investment horizon,  liquidity requirements and risk appetite
  • Alongside this, the desired investment return on the portfolio should be weighed against the acceptable risk to be undertaken to derive a suitable allocation between equity funds and bond funds
    1. Diversify within each asset class
  • Japan in a case in point where investing in a single country’s stock market has provided detrimental long-term investment returns; investing globally is a good investment mantra to adopt
  • Investing across different markets reduces country-specific risk, and also allows the portfolio to benefit from global growth
  • Global equity funds like the Aberdeen Global Opportunities or RIC World Equity II ClJ USD are already geographically diversified; investors could also utilise a combination of broader regional equity funds like First State Asian Growth Fund (Asia ex-Japan) or Aberdeen Global Emerging Markets (Global Emerging Markets)
  • Even for fixed income, diversification is essential; investors should be aware of higher risk segments like high yield bond funds and emerging market debt funds which should not be allowed to form too large a proportion of the portfolio 
    1. Select the funds
  • Our Recommended Funds List forms a starting point for investors to choose from; the list spans both equity funds and fixed income funds, and covers various global, regional and single-country markets
  • The Fund Selector feature is a useful tool to sieve through the wide array of funds available on the platform; the Chart Center supplements the analysis by allowing for easy visual comparison of fund historical performance
  • In addition to factsheets and the prospectuses, related articles tagged to each fund offer more insight into the fund’s strategy and past performance
    1. Ongoing Action and Monitoring
  • We suggest a long-term approach for investments; however, that does not entail forgetting about the portfolio after the initial investment is made
  • While our portfolio approach is relatively passive in nature, we suggest investors rebalance their portfolios (see “Have you rebalanced your portfolio?”) on an annual basis at least, to ensure that the portfolio’s allocation does not deviate too significantly from the intended target
  • Reading the semi-annual or annual reports of funds in the portfolio may not be very appealing, but these (along with the monthly fund factsheets) usually offer much insight into the fund manager’s approach and style via manager commentaries and more detailed fund holding information; if you realise that a manger is not performing up to expectations, it may be time to switch
  • An investor’s willingness and ability to take on investment risk, as well as the expected or required returns on the investment will change over time due to changing circumstances; this may require adjustments to the portfolio allocation to better accommodate these new factors and ensure that the portfolio remains relevant
  • We think portfolio construction should encompass these four steps (in some form or other), and our Recommended Portfolios are constructed based on these same principles. Chee Kin’s piece (“Introduction to Portfolio Management”) offers more details on the portfolio construction process, while Nick’s two articles (“Build a Simple, Globally-Diversified Portfolio With Less than S$5000 (Part 1 of 2)” and “Build a Simple, Globally-Diversified Portfolio With Less than S$5000 (Part 2 of 2)”) focus on how investors can construct portfolios with smaller sums of money.

    Investors who disagree with our portfolio construction approach or feel they have the perfect portfolio may wish to impress us with their investment acumen by participating in the current “Members' Portfolio Challenge” which closes at 11.59pm on 31 Oct 2011.  

     

    Related Articles:

    Impress Us With Your Investment Acumen - the Members' Portfolio Challenge
    Introduction to Portfolio Management
    Build a Simple, Globally-Diversified Portfolio With Less than S$5000 (Part 1 of 2)
    Build a Simple, Globally-Diversified Portfolio With Less than S$5000 (Part 2 of 2)
    Have you rebalanced your portfolio?

    iFAST and/or its licensed financial adviser representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website. If you have any queries about the above contents, please contact iFAST.