Building an investment portfolio by proper asset allocation is a crucial step in ensuring your financial success.
What’s Asset Allocation?
Your investment portfolio consists of different asset classes. Some might give you higher returns, or are more volatile; some are more stable in price but give you lower returns. You need to allocate these assets in a way that you earn the highest possible returns, within your risk tolerance.
Equity (also called stocks) is a very common investment vehicle. Holding equity means you own a piece of the underlying business. Stock is being traded in the stock markets, and its price generally increases in the long run as company earnings increase. However, in the short term stock price fluctuates as investors react to the news. A lot of research has shown over the long run, equity is a much superior investment that can give decent returns.
Fixed income refers to the investment that borrowers pay you a pre-determined income regularly. It can be a fixed deposit from a bank, government bond, or corporate bond. I also consider CPF OA and SA as fixed income since they are paying interest annually. Fixed income is typically less volatile, you need it in your portfolio to reduce the volatility of your wealth so you can sleep better.
Besides equity and FD, people also include other types of investment in their portfolios to make them more diversified. One common investment is real estate where one can purchase properties and earn rental income. Others trade commodities, hedge funds, and cryptocurrencies, which I wouldn’t recommend unless you understand how it works and accept the risks.
How Do You Determine What Allocation Works For You?
Start with stocks and FD, and if you are young and have a long investment horizon, I think you should consider having a more aggressive stock exposure. However, if you find your mood is affected by stock market movement, consider adjusting your allocation until you feel comfortable sleeping.
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