Ideal Portfolio Composition

chill_lax

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Hi all, I am a newbie looking to build up my portfolio. I am aiming for growth and possibly some passive income in form of good yield over the years. I have looked around and seen many different composition of a portfolio. Can the gurus here share some insight on how best to form one (eg how many % in stocks, etc) and perhaps share some of your successful portfolio so newbies can learn from? Thanks! :)
 

Shiny Things

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Sure.

So my dead-easy method is as follows:

Step 0: figure out how much you can safely invest. Don't forget to keep an emergency fund equal to six months of expenses.
Step 1: put "110-minus-your-age" percent in stocks.
Step 2: put the rest in bonds, or as cash in your CPF.
Step 3: go to the pub.
Step 4: come back in a year and rebalance your portfolio - sell or buy to bring the percentages back to "110-minus-your-age in stocks and the rest in bonds".

That's it.

You can basically go off and do that right now. But here's a bit more detail, if you'd like to know the how and why.

Firstly, the emergency fund. That's absolutely critical - it's a safety net in case you lose your job or get hit by a bus and your insurance doesn't cover it. It means you won't go broke or have to flog your stocks or anything like that.

Secondly, the "110 minus your age" thing. When you're young, you can afford to have a lot of money in stocks - on average, stocks make more than bonds, and if you have one bad year like 2008, you can afford to wait for everything to come back. When you're close to retirement, though, you need to avoid big drawdowns, because that money's supposed to be funding your retirement, and if you lose 30% of it you'll have to cut your withdrawals. So as you get older, you should have less in stocks and more in bonds.

(Normally the rule is "100 minus your age"; I'm tweaking it because bond yields are particularly low right now, so you don't want to be too heavy in them.)

As for what stocks and bonds to choose: for your stocks component, you'll mostly want ES3, the STI ETF index fund. This fund buys and holds all the big stocks in the Straits Times Index. (If you're young, and comfortable with risk, you can look overseas for better returns - VWRD on the London stock exchange is a great fund that buys and holds all the big stocks in the world. You can buy that and sit on it for decades. As you get older, though, you should bring all your money back home to Singaporean investments.)

For the bond component, you'll want to put it mostly in CPF, because the 2.5% or 4% or whatever it pays is massively above market. It's free money. For anything you can't squeeze into CPF, put it in A35, the bond equivalent of the STI index fund I mentioned above.

Thirdly, rebalancing: let's say you start the year with a 70-30 allocation to stocks. Let's say they have a great year, and by the end of the year, stocks are 80% of your portfolio instead of 70%. At the end of the year, you should sell stocks and buy bonds so your allocation goes back to 70-30 (or 69-31, because you're a year older, but near enough is good enough).

This forces you to sell your winners (which are expensive now) and buy the losers (which are cheap now). It only takes ten minutes a year, and it's proven to add 1-2% to your portfolio returns - and over thirty years, that's A LOT OF MONEY.

Fourthly, the pub. I like Hendricks and tonic, with a stick of cucumber if you're somewhere really classy.

And since you asked what I have, here's my portfolio right now, and the ETFs I use to implement it. I'm US-taxed, and US- and Australia-focused, rather than Singapore-focused, so you won't want to use the same funds I do, but the asset allocation idea is the same. (Also I use a few more asset classes than the broad stocks-and-bonds categories listed above, but that's because I like to overcomplicate things.)

Also come to think of it, it's coming up to my annual rebalancing time. Time to take some profit on my stock holdings. It's been a very good year.

Stocks: 79%
US: 45% (SPY and VO)
Developed markets ex-USA: 29% (VEA)
Emergings: 5% (VWO)

Bonds: 21%
USD IG corp short-term: 9% (CSJ)
USD long-term municipal bonds: 9% (CMF)
USD HY corp: 3% (JNK)
 
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VictorvonDoom

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The 1000 share lot size for ES3 makes it difficult to re-balance. By selling off one lot of ES3 may make the composition to be off.

Any good way to go about that? :s11:
 

Shiny Things

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The 1000 share lot size for ES3 makes it difficult to re-balance. By selling off one lot of ES3 may make the composition to be off.

Any good way to go about that? :s11:

Sure: use G3B instead. It's basically exactly the same thing (an ETF that tracks the STI), but it's got a 100-share lot size instead of a thousand.
 

CPl_Giroro

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Hi Shiny Things,

Let’s say I start investing today in a 70-30 portfolio ratio and decided that since I’m a lazy bugger, I will only rebalance my portfolio once year. I also assume that I have the holding power and have no immediate – mid term needs for the money.

I would like to clarify my assumption of the rebalancing taking into account that there are new funds available (from dividends, savings and bonuses) for investment at the time of portfolio rebalancing?

So at the time of the balancing, I should follow the following steps?

Step 1 - Determine what is the current stock – bond ratio
Step 2 - Determine how much excess funds (from savings, dividends and bonus) that can be invested
Step 3 – Purchase stocks and bonds in amounts to reach desired portfolio ratio(as close as possible)
Step 4 – Have a beer and call it a day.

I am just worried about this approach I mentioned as it is not taking advantage of selling the winners and advantage of the portfolio balancing approach.
 

JoePilot

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Different rebalancing strategies:

1. Time based. Eg, rebalance annually or as frequent as monthly.

2. Threshold based. Eg, rebalance only when one component has shifted, say, +/-10%

3. Time and threshold based. Combination of the above, at preset time intervals. So if my interval is quarterly, every quarter I will check if there is a portfolio shift greater than my predetermined threshold level.

4. Dynamic Asset Allocation. Rebalance, according to Capital Market Assumptions, valuations, earnings, interest rate climate, exchange rates etc. Usually available only to institutional investors.

No need to sweat too much about which strategy to use, cos the difference is small, and rebalancing doesn't add much to returns. Bulk of yr returns comes from asset allocation.
 

Shiny Things

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I would like to clarify my assumption of the rebalancing taking into account that there are new funds available (from dividends, savings and bonuses) for investment at the time of portfolio rebalancing?

So at the time of the balancing, I should follow the following steps?

Yep, you got it.

I am just worried about this approach I mentioned as it is not taking advantage of selling the winners and advantage of the portfolio balancing approach.

Nope, there's a sell step in there as well. If you can't get yourself to your target level with the new money alone, then you sell a bit extra of whatever's outperformed, and reinvest that cash into whatever's underperformed.

Other than that, what you described is exactly right, though I disagree with your step 4 methodology - sav blanc over beer is my recommendation.
 

SpeedingBullet

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Yep, you got it.



Nope, there's a sell step in there as well. If you can't get yourself to your target level with the new money alone, then you sell a bit extra of whatever's outperformed, and reinvest that cash into whatever's underperformed.

Other than that, what you described is exactly right, though I disagree with your step 4 methodology - sav blanc over beer is my recommendation.

OOT:

Your reallocation to European ETFs must be cracking now. Congrats!
 

Pandule

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Hi Shiny Things,

I'm 26 this year. As you said CPF can be considered our Bond Component, can we just focus on purchasing G3B until about age 50 - 60 before we rebalance? since our money in the Special account of CPF(which gives 4%) must be more than 40k before we can do investing.

Next, I'm currently investing the min amount of $100 in both POSB investsaver and OCBC BCIP. Once i have more cash flow next year, I have some ideas on what i will do.

1) Pump in more money into OCBC BCIP/POSB investsaver, do DCA.
2) Pump in money into SRS account, use SRS accounto do OCBC BCIP(DCA)
3) Pump in money into SRS account, use it to buy lots of STI ETF every month/year.
4) Use Standard chartered account to get 1 lot of G3B each month.

Hope you will be able to give me(us) your valuable insight.

Cheers.
 

genie47

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Rebalancing requires you to have access to the funds to rebalance.

If you consider CPF as your bond, you are stuck because you will have to top up continually from your cash to the stock component. You cannot just take your money out of your CPF and rebalance.

CPF is where it gets complicated. Your CPF-OA Cash is actually your bond component in the CPF. You can't touch your CPF-SA for stock investments. Not even the STI ETF.

So in your OA, you cannot invest your first 20k. The amount you can invest is whatever you have -20k.

Then you can't really do a lot of investment because you got to assume you are going to buy a flat in the near future.

So for simplicity, don't invest your CPF. Invest the cash that you save up. This allows you freedom to rebalance.

You can invest your CPF. As someone has mentioned in the great CPF debates in EDMW, you transfer your OA to your SA pushing it to earn the higher 4% interest. The money is going to be stuck anyway. Again, do so if you already have a HDB flat etc.

My wife for example has pushed most of her OA into her SA meeting the MS very early and with the contributions and interest earned from it, it overtakes the MS easily every year. She is then made free to invest her OA into the STI ETF. So she rebalances the STI ETF with the uninvested CPF OA -20k.

In short, there is not much you can do with CPF.
 

Shiny Things

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My wife for example has pushed most of her OA into her SA meeting the MS very early and with the contributions and interest earned from it, it overtakes the MS easily every year. She is then made free to invest her OA into the STI ETF. So she rebalances the STI ETF with the uninvested CPF OA -20k.

This is good advice. I honestly don't know all the ins and outs of CPF, so you'll want to listen to this guy for how to manage the CPF component in a sensible way.
 

genie47

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This is good advice. I honestly don't know all the ins and outs of CPF, so you'll want to listen to this guy for how to manage the CPF component in a sensible way.

To borrow from the movie Oblivion, "are you an effective team?" I paid for the flat totally with no input from her CPF. This left her free from any commitment from her OA. This allowed her freedom to deploy funds to areas of higher growth.

Thete no generalists. Only specialists when you are married.
 

Dividends Warrior

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To borrow from the movie Oblivion, "are you an effective team?" I paid for the flat totally with no input from her CPF. This left her free from any commitment from her OA. This allowed her freedom to deploy funds to areas of higher growth.

Thete no generalists. Only specialists when you are married.

Yes. Good old teamwork. :)
 

chill_lax

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Thanks all for the valuable replies. I believe newbies like me here can learn a decent lot from you. I am currently looking at building up my stock portfolio, but picking the right stocks is a challenge by itself. Also considering the STI ETF or Nikko ETF as mentioned by some here. :s13:
 

quirkyhill

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Thanks all for the valuable replies. I believe newbies like me here can learn a decent lot from you. I am currently looking at building up my stock portfolio, but picking the right stocks is a challenge by itself. Also considering the STI ETF or Nikko ETF as mentioned by some here. :s13:

'building up my stock portfolio': same here :)

now just started dollar cost averaging investing (sti etf using poems share builder account) :)
 

QNH1013

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To borrow from the movie Oblivion, "are you an effective team?" I paid for the flat totally with no input from her CPF. This left her free from any commitment from her OA. This allowed her freedom to deploy funds to areas of higher growth.

Thete no generalists. Only specialists when you are married.

Wow. Can I ask how do you and your wife manage your finances as a whole? Do you guys have a joint account as well?

For my wife and myself, we're still trying to figure this one out. We are both paying for our flat with our CPF, and more or less sharing all other joint expenses (no real way of dividing. Its just gut-feel mostly). We don't have a joint account, and we manage the rest of our finances individually (but with full disclosure to one another).
 

chill_lax

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i am unsure about whats the best way to manage accounts between couples. Will a joint account be better since relationship is based on trust? or a separate account but the decision on who to spend how much on what has to be quite clear from the start.

Personally i will feel that a joint account is to be used for daily expenses, another for investments and another for saving.
 
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