How to invest if you have $20k or more + Life Cycle Guide of Investing

I was reading an ST article today shared by my friend on facebook.

It was titled: "How to invest if you have $20k or more".

The gist of the article is summarised as follows:

Define your investment objectives, the time horizon of different types of investments, aim for your overall savings to yield at least as much as the inflation rate, assess your risk profile and do your homework.

"A younger individual can afford to take on more risk in their investments because they have time on their side, while an older individual may choose to be more risk-averse." He notes that when it comes to investing, investors should follow the general principles of diversification, dividend investing, compounding and time.

The suggestions for different investment amounts:

• $20,000 - 100 % Unit trusts
• $50,000 - 40% Stocks And 60 % Unit trusts
• $100,000 - 60% Stocks, 30 % Fixed income assets And 10 % Real estate investment trusts

The suggestions for different risk profiles:

• Low-risk portfolio 
• 42% Fixed-income products such as bonds
• 28% Equities
• 30% Cash.
• Medium risk portfolio
• 29% Fixed income
• 56% Equities
• 12% Cash
• 3% alternative investments such as gold.
• High-risk portfolio
• 4% Fixed income
• 89% Equities
• 7% alternatives
• 0% cash.

Very good ideas there.

The idea of diversity is to spread risks across countries to spread risk, as well as asset classes such as bonds and real estates (using REITs). Also utilising a long time horizon, one can reap the benefits of compounding interest.

BUT

When picking Unit Trusts (or ETFs) for diversity, those countries must be inversely correlated to one another, if you picked all of them that are extremely correlated, diversity counts for nothing ^^"
Do also know the components of the Unit trusts and ETFs, 40% stocks and 60% in UTs are not much different from 100% stocks if the UTs are wholly holding stocks (equities) as well.

Fixed income such as bonds are also dependent. There's stuff from company junk bonds to AAA treasury bonds. Make sure you get the AAA bonds (if you want to reduce volatility). But that being said, bond yields do fluctuate with interest rates, and at times be more risky than cash. Do take note.

Gold prices do fluctuate too, check the chart. Silver too.

So instead what I propose is this: (quoting from A Random Walk Down Wall Street by Malkiel with some of my thoughts)

Run down this checklist first.

1. Do you have 3-12 months of expenditure in reserve?
• These provide ease of access (liquidity) to provide a cushion during hard times.
• The amount may be larger especially if your income is unstable 
• If the reserve is absent, make sure you put money in it first (i.e. Bank account).
2. Are you adequately insured?
• The longer you invest, the more attractive earnings you get, you wanna have staying power and not liquidate your positions when you are sick.
• If you have no insurance, get educated and buy some first.
3. Know your investment objectives
• Find your risk tolerant level (The amount of risk in your portfolio must be low enough for you to sleep well at night, i.e. if too much risk, sell some stocks and put into bonds to reduce risk)
• It is critical to understand yourself before choosing specific investment vehicles for investing
4. Pay at less tax as possible
• Good thing is that Singapore taxes you mostly on consumption.
• You can legally reduce/defer tax by various methods such as donations, CPF SA/RA topups, SRS, etc 
• By paying less tax, you save more, which could be used to channel into investing.
5. Let your cash reserves keep pace with inflation
• Core Inflation in Singapore is about 2%, but I generally use 3% as a conservative estimate.
• As much as possible without taking too much risk, your instruments should keep in pace if not beat inflation.
• For money waiting to be invested into the instruments you want, you can park them temporarily in fixed deposits, SSB or bond laddering while waiting, instead of letting them sit there collecting dust.
• For emergency funds, I would suggest as liquid as possible, ranging from OCBC 360 account, fixed deposits and maybe SSB.
6. Own your own home instead of renting if possible
• "Rule of 15" says that if we could buy a home at a price that is 15 times or less the annual rent a similar property would fetch in the area, it makes more sense to buy than to rent. (Thanks AK)
7. Beef up your portfolio with REITs
• Real Estate generally provides a more dependable hedge against inflation than stocks in general.
• Real estate provides diversification as they generally have little correlation with other assets.
8. Investments in gold/collectibles can be done but go light on them, as they may not appreciate in value less inflation.
• I prefer gold/silver to collectibles in general.
9. Pay as little commissions and fees as possible
• Compounding costs adds up, these eat into your profits over time. It may seem little now, but adding them over a long time horizon, it is a lot!
10. Life Cycle Guide to investing
• Asset Allocation Principles
• Risk and Returns are generally positively related
• The longer the holding period, the lower the risk
• The longer the time horizon, the more likely stocks will outperform bonds
• Lump Sum Investing (LSI) outperforms Dollar Cost Averaging (DCA) for 2/3 of the time, but it means you must have to courage to invest in bear markets regularly. 
• Else DCA is fine but do note that for small purchases, commissions do eat in significantly.
• Attitude and Capacity for Risk is different for a widowed 65 year old and a 26 year old fresh MBA grad.
• Three Guidelines to tailoring a life cycle investment plan
• A specific need must be funded with specific assets dedicated to that need (i.e. if you need 30k in one year for house downpayment, a 12 months fixed deposit might be better as you can't lock it up for long, nor you wanna risk losing it)
• Remember your risk tolerance
• Persistent savings in regular amounts, no matter how small pays off (that includes savings in taxes and commissions/fees)
• The Life Cycle Investment Guide
• Risk should be high in their twenties and slowly decrease with age.
• As the investors age, they should start cutting back on risker investments and increase portion of portfolio in bonds and stocks that pay generous dividends such as REITs.
• In retirement, a portfolio heavily weighted in a variety of bonds is recommended.
• For most people, choose broad-based total stock market index funds rather than individual stocks for portfolio formation.
• Suggestions of portfolios for varying ages:

BONUS:

How about a Dividend heavy portfolio that is similar to an annuity?

Here are some suggestions:

When markets are down and stocks are cheap

When markets are skyrocketing too high, stocks are expensive

What about me?

This is my proposed portfolio, where

• 90% Equities (International equities, consisting of China, India, Europe, Japan and Emerging Markets in equal portions, would be Manulife ILP, which eventually be shifted into ETFs)
• 10% Cash and Cash Equivalents (which includes warchests in bank accounts, hopefully CPF and Gold, but Gold is kept at maximum of 2-3% of portfolio)
• Allocations are done according to my risk profile and appetitie

I hope it helps! =)

WITH $20,000 - 100 % Unit trusts
WITH $50,000 - 40% Stocks And 60 % Unit trusts
WITH $100,000 - 60% Stocks, 30 % Fixed income assets And 10 % Real estate investment trusts
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