The "Art" of Asset Allocation (Part 2)

In my previous post here, I talked about how one can start thinking about asset allocation by factoring in human capital as an asset. I suggested that insurance can help us to safeguard against mortality risk, which is the sudden, unexpected loss of human capital caused by premature death (“PD”). Bear in mind though that you shouldn’t treat insurance as a way to create a quick windfall. The proper use is to fund what would have been accumulated if PD did not occur.

Whole Life/ILP or Term?

Last weekend, while waiting for my husband at a mall, I was approached by a salesman who was pushing “savings plans” offered by one of the major insurers here. Just for curiosity’s sake, I decided to hear him out to find out what’s currently being offered in the market. (Also because I was tempted by the free powerbank hehe.) I told him upfront that I already have a term life insurance plan. He asked me what I am doing with my savings, and I said I invest in the stock market. He looked at me incredulously and said, “Do you know what happened a few days back?”. Me: “Yeah. US elections.” “Then you must know that everything dropped after that.” (It was actually still relatively stable then - the calm before the storm. Anyway.) “Um yah lor.” Salesman: “I know people always say you should take more risk when you’re younger, but sometimes you also need something safe.” (Ok somebody is making generalisations without even trying to get to know what are my needs.) Me: “That’s why I have my cash.” Then he dived right into his sales pitch on how the banks offer only 0.05%-0.20% on standard savings deposits, which is pathetic. Ok I know that, so I use the OCBC 360 which has pretty decent rates, I said. Salesman: “Huh but you still need to credit your salary, spend $500, giro 3 bill payments...”

I didn’t get to finish hearing his sales talk, because shortly after that my husband came over and pulled me away. So, I didn’t get the free powerbank in the end. :(

I have an idea of where it is heading though, and it will not be what I’m looking for. To me, insurance should be as simple as a basic income replacement. It should be what you expect it to be and what you expect to get. What he was selling, an ILP, is not. It is a jack of all trades but a master of none. It helps you invest, but it’s not very good at it because of the high expenses. It provides you with some coverage, but not worth the premium that you pay. And I have to be locked in for a good 20 years or so before I can try to reap what I sow? No thank you.

Also, remember the theory of human capital? One actually doesn’t need life insurance throughout our entire lives. As you age, your human capital diminishes until it reaches zero at retirement as paid earnings will cease. (Ideally, meanwhile you should have been accumulating financial capital to replace this human capital.) The less human capital, the less need for insurance to insure against the loss of human capital.

Investing Your Financial Capital

I would also like to believe that I can invest and make better returns on my own, with a little bit of strategy (and luck). Having a strategy is important because it helps you stay the course while the market gyrates - the standard wisdom is to “set an asset allocation and diversify”. However, the tough part is that you need to figure out your risk tolerance first and then tweak your portfolio accordingly. More often than not, you don’t really know your true risk tolerance until you’ve been tested.

My risk tolerance test came in 2015 - my first bear market experience. Stocks that I bought after the prices fell by 10%, fell further by another 20%. It was a pretty tough ride. I also realised that I wasn’t diversified at all. All the stocks in my portfolio were affected by the same market forces, even if they are in different countries or sectors. Here I quote a passage from a Bloomberg article which can perhaps explain why: “When markets are stressed, investors tend to operate in a risk-on or risk-off manner. They treat individual stocks as tokens of the equities asset class and are either exposed to it or not. In a risk-off wave, they’re all indiscriminately sold, and then in a risk-on relief rally, they’re all bought back.”

Since then, I’ve shifted more into blue chip names that I’m familiar with, and got rid of the odd ones lying around.

My Current Allocation

Looking at my allocation now, I probably can consider consumer pure plays just to add some diversification. The US market is rotating into cyclical (banks especially) from defensive sectors as investors are expecting President-elect Donald Trump’s pro-growth policies to reinflate and boost the economy. Will this theme spread to the Singapore market? (You can see some signs in the price movement and technical signals of the local bank stocks.) The TPP negotiations will be one key issue to watch for sure, because of Singapore’s export-oriented economy. For me, I’m still pretty comfortable with my exposures and will look to add on weakness. Remember, us young investors should want bad markets from time to time so that we can buy stocks cheap.

That’s all for my ranting for today, huat ah!

Cheers,

Yolohuat