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PR Newswire
Jul 3, 2011
small change
Have patience, will profit
Value-based asset allocation plan, checked periodically and adjusted when needed, will bring rewards
By Philip Loh
As the old adage goes, a watched pot never boils. But in the hope of achieving double-digit returns every year, many impatient investors have almost zero tolerance for losses and so end up taking on too much risk.
If their portfolios are not making some progress within a month or two, they may be tempted to make some changes in the hope of improving the overall performance almost instantly.
As a result, they often end up switching to the most favoured funds of the day, which may actually do their portfolios more harm than good in the long run. This is because 'hot' funds can become the worst-performing funds the following year when the law of averages kicks in.
So, rather than monitoring your investment portfolio 24/7, it may be better to formulate some longer-term asset allocation strategies based on how attractive the valuations of the asset classes are and review them only periodically.
With this value-based strategic approach to asset allocation, you only need to periodically alter how much to assign to the various asset classes - such as US equities, Asian equities, sector-specific equities, country-specific equities and bonds - based on their relative valuation attractiveness.
This allocation strategy may seem deceptively passive as you need to look at it only at lengthier intervals of say three or six months, but you would be surprised to find that it still allows you to be nimble enough to take advantage of the many investment opportunities that present themselves from time to time.
Forsake buy-and-hold strategy
The greatest enemy of most retail investors today is probably their blind faith in a buy-and-hold strategy. Often, many kind-hearted advisers remind us that it is not timing the market, but time in the market that matters, so we are usually too frightened to make any changes to our portfolio.
But it pays to remember that the investment game is more like playing poker than roulette, as the action of other players in the former can also affect you, whereas in roulette, the behaviour of others at the table is completely irrelevant to you. This means that when more investors are after the same asset class, this may alter the returns as compared to when fewer investors are after it.
The misplaced faith of many investors in the efficiency of the markets can lead to financially catastrophic consequences. Often, they are misled into buying into some hot fund or overvalued asset class and when the market turns against them, their advisers tell them to hold on to it still in the hope that they can one day break even or recoup their losses. It is not surprising, therefore, that many investors today are still holding onto the technology funds they bought more than 10 years ago during the Internet bubble in the late 1990s.
Stick to long-term asset allocation strategy
Rather than switching funds every now and then or holding onto assets when it no longer makes sense to do so, stick instead to a pro-active asset allocation strategy with a long-term perspective. It may take us many years of conditioning to be unfazed by sensational market news, but when you practise this strategy long enough to see its benefits, you will realise the folly of those who do not.
Do note if any change in our portfolio is warranted, it should be because our asset allocation plan dictates it. This may at times seem to make us go against our very instincts, but taking the path less travelled will often yield handsome results.
For instance, in early 2009, I proposed that my clients should consider investing in the Asean market. Although most funds were losing value at that time, the region was more badly hit than most because of the political uncertainty in key markets like Thailand, Indonesia and even Malaysia. Valuations were therefore at an immensely attractive level. Not all were convinced, but those clients who did heed my advice would now be in a very good position to book their profits, as the region has since proven to be one of the top performers.
Indeed, the implementation of an active, value- based asset allocation plan may require immense patience, as some strategies might take years to bear fruit. For example, if we allocate more to an asset class because the valuation is low, it is possible that it may become even lower and this can often stretch for a period of more than three years.
The willingness to be contrarian is also vital for initiating strategic positions as we need to have the determination to stick to our guns and sometimes do the exact opposite of what everyone else may regard as logical at that point in time.
The best way forward
As a general rule, we should try not to predict the short-term performance of an asset class for market-timing purposes, as history has shown that this is seldom a winning strategy.
The best way forward therefore is to develop a value-based asset allocation plan. After that is done, the only thing to do is to stop looking at the pot every day, but rather evaluate your plan at periodic intervals and adjust your portfolio only when necessary.
The writer is a chartered financial consultant and executive manager of financial services with insurer Great Eastern Life. The views expressed are his own. Comments are welcome at www.philiploh.com/ .
small change
Have patience, will profit
Value-based asset allocation plan, checked periodically and adjusted when needed, will bring rewards
By Philip Loh
As the old adage goes, a watched pot never boils. But in the hope of achieving double-digit returns every year, many impatient investors have almost zero tolerance for losses and so end up taking on too much risk.
If their portfolios are not making some progress within a month or two, they may be tempted to make some changes in the hope of improving the overall performance almost instantly.
As a result, they often end up switching to the most favoured funds of the day, which may actually do their portfolios more harm than good in the long run. This is because 'hot' funds can become the worst-performing funds the following year when the law of averages kicks in.
So, rather than monitoring your investment portfolio 24/7, it may be better to formulate some longer-term asset allocation strategies based on how attractive the valuations of the asset classes are and review them only periodically.
With this value-based strategic approach to asset allocation, you only need to periodically alter how much to assign to the various asset classes - such as US equities, Asian equities, sector-specific equities, country-specific equities and bonds - based on their relative valuation attractiveness.
This allocation strategy may seem deceptively passive as you need to look at it only at lengthier intervals of say three or six months, but you would be surprised to find that it still allows you to be nimble enough to take advantage of the many investment opportunities that present themselves from time to time.
Forsake buy-and-hold strategy
The greatest enemy of most retail investors today is probably their blind faith in a buy-and-hold strategy. Often, many kind-hearted advisers remind us that it is not timing the market, but time in the market that matters, so we are usually too frightened to make any changes to our portfolio.
But it pays to remember that the investment game is more like playing poker than roulette, as the action of other players in the former can also affect you, whereas in roulette, the behaviour of others at the table is completely irrelevant to you. This means that when more investors are after the same asset class, this may alter the returns as compared to when fewer investors are after it.
The misplaced faith of many investors in the efficiency of the markets can lead to financially catastrophic consequences. Often, they are misled into buying into some hot fund or overvalued asset class and when the market turns against them, their advisers tell them to hold on to it still in the hope that they can one day break even or recoup their losses. It is not surprising, therefore, that many investors today are still holding onto the technology funds they bought more than 10 years ago during the Internet bubble in the late 1990s.
Stick to long-term asset allocation strategy
Rather than switching funds every now and then or holding onto assets when it no longer makes sense to do so, stick instead to a pro-active asset allocation strategy with a long-term perspective. It may take us many years of conditioning to be unfazed by sensational market news, but when you practise this strategy long enough to see its benefits, you will realise the folly of those who do not.
Do note if any change in our portfolio is warranted, it should be because our asset allocation plan dictates it. This may at times seem to make us go against our very instincts, but taking the path less travelled will often yield handsome results.
For instance, in early 2009, I proposed that my clients should consider investing in the Asean market. Although most funds were losing value at that time, the region was more badly hit than most because of the political uncertainty in key markets like Thailand, Indonesia and even Malaysia. Valuations were therefore at an immensely attractive level. Not all were convinced, but those clients who did heed my advice would now be in a very good position to book their profits, as the region has since proven to be one of the top performers.
Indeed, the implementation of an active, value- based asset allocation plan may require immense patience, as some strategies might take years to bear fruit. For example, if we allocate more to an asset class because the valuation is low, it is possible that it may become even lower and this can often stretch for a period of more than three years.
The willingness to be contrarian is also vital for initiating strategic positions as we need to have the determination to stick to our guns and sometimes do the exact opposite of what everyone else may regard as logical at that point in time.
The best way forward
As a general rule, we should try not to predict the short-term performance of an asset class for market-timing purposes, as history has shown that this is seldom a winning strategy.
The best way forward therefore is to develop a value-based asset allocation plan. After that is done, the only thing to do is to stop looking at the pot every day, but rather evaluate your plan at periodic intervals and adjust your portfolio only when necessary.
The writer is a chartered financial consultant and executive manager of financial services with insurer Great Eastern Life. The views expressed are his own. Comments are welcome at www.philiploh.com/ .
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/