Allocating Your Investment Assets For Steady Growth

Allocating Your Investment Assets For Steady Growth
Lately, I have come across many “investors” who are experiencing significant losses on their investments, either due to the current bear market or the underperformance of their investment. And because of this, many book readers have approached me, worried about their investments. The most frequently asked question I encounter is: “How do I make money on my investments during a tough market like this?”

I find it gratifying when individuals approach me with an awareness of the significance of investing and have already undertaken the necessary steps to grow their wealth. However, as an investor, it is crucial to grasp the fundamental principles behind investing to achieve the desired outcomes.

Given this perspective, it is worth considering an alternative approach for investors. Instead of fixating on the question of how to make money, investors should ask themselves – what asset classes are they investing in and how are they allocating their money?

The question itself is a game changer for investors, yet it is a step that many people seem to overlook.

Here’s the thing, many investors start out making a bold move to grow their money. Later, as time goes by, they neglect revisiting their investments to understand how their money is working for them. In some cases, this oversight can prove even more detrimental than not investing at all, particularly if the investment consistently underperforms and in doing so, depletes your financial assets.

As a licensed fee-charging financial advisor, I often find that clients tend to focus on investing in certain stocks, mutual funds, or chasing after trending investments without considering the bigger picture of their overall portfolio.

If you are young and in your late 20s or early 30s, this may be still acceptable. However, if you’re in your 40s onwards and preparing to save for retirement, this is not a time to take risks and make uncalculated decisions with your money.

To ensure that you always have a steadily growing investment portfolio, it is imperative to maintain a well-balanced investment portfolio. The key is understanding the concept behind asset allocation, as it is one of the best tools a long-term investor can leverage on.

If you are not already familiar, asset allocation entails the division of an investment portfolio into various asset classes, such as stocks, bonds, REITs and cash. This strategic approach aims to optimize returns while minimizing risk. In this article, I will delve into the significance of asset allocation and provide guidance on where to start to ensure your wealth is growing steadily.

Why is asset allocation important?

In essence, asset allocation serves as a crucial mechanism for investors to achieve their financial goals while significantly mitigating risk. By diversifying their investments across various asset classes, investors can diminish their exposure to any individual asset class, sector, or market.

Let’s take for example the case of Robert. Robert has heavily invested in the property market. Having purchased and leased more than 10 properties under his name, Robert witnessed his net worth grow through rental income as well as the appreciation in property value. However, in 2020, Robert faced a significant challenge as he lost almost all of his tenants, leaving him responsible to bear all the loan repayments on his own.

While the government initiatives initially aided in mitigating some of the losses, Robert began to feel the impact once these subsidies stopped. He struggled to find tenants and found his own emergency fund depleting quickly. To quickly recover from this, Robert had no choice but to sell off three of his properties in order to generate cash flow to support the remaining properties. Unfortunately, due to urgency to sell, he had to settle for an average drop in value of 40%, resulting in a significant setback.

From the example above, it becomes evident that Robert faced significant consequences when he concentrated his investments exclusively in property, putting all his eggs in one basket. When the property market crisis hit, there was a significant impact on his wealth portfolio. However, by diversifying across different sectors and asset classes, Robert could have limited the impact of the fallen property market, and buffered that loss through his other investments that were likely to increase in value during that time.

To put it simply, asset allocation is a fundamental long-term investment strategy that helps investors maximise their returns over time. This is because different asset classes have different risk and ROI potential, and thus investing in more than one asset gives you a higher chance of having growth in your portfolio. For instance, stocks are generally considered more volatile than bonds, but they also have the potential for higher returns. By including both stocks and bonds in a portfolio, investors can strike a balance between risk and their ROI, potentially achieving higher returns in the long run than they would with a portfolio that only contains one asset class.