Monday, March 31, 2008

Asset Allocation

Dear Mr. Tan,
I read a comment in the blog from someone who said that a long term investor should look at asset allocation, which accounts for most of the yield. Can you explain this concept?

Asset allocation means choosing the class of assets to invest in. The main classes are:
a) Equity
b) Bonds
c) Property
d) Cash

Within each class, there are sub-classes to choose from, e.g. different markets or sectors.

If you are focusing on asset allocation, you are giving less emphasis on stock selection, i.e. choosing the specific shares or bonds within the sub-class. You can invest in a fund that is invested in many shares or bonds within the sub-class. This is called diversification.

For a long term investor, the yield on equity is higher than bonds. I advice long term investors to invest in equities and ride out the volatility, i.e. average out the good and bad years.

Read this FAQ to get some information about the long term yield on various asset classes:

For my long term investments, I prefer to invest in Singapore equities, e.g STI ETF or in global equities, e.g. S&P 500. The S&P 500 are the largest US companies, which have global operations. I prefer indexed funds, as they have low charges.


Anonymous said...

What about commodities? Which class of asset does it categorize to? Nowaday, there's a highlight of this fund.

Is it worthed to invest in Unit Trust fund, compare to the indexed fund? Currently, I only have invested in Unit Trust. Is it enough? However, I am aware and selective to the low cost UT fund, which I think should be less than (or equal to) 2% sales charge, and less than 1-1.5% annual expense. Do I still need to invest in indexed fund?

Zzz said...

Commodity is another asset class seperated from the four mentioned by Dr. Tan. About the commodity fever, you may refer to this article
Index fund is one kind of UT. It has the advantage of low ER, however, it may not perform better than some of the active managed UT. Nevertheless, in long term, index fund outperform most active managed UT.

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