Investment Fund Allocation

For those who have basic understanding on financial planning should understand the importance of fund allocation.  Techinically speaking, fund allocation should be make according to your risk profile.  If you are a conservative investor, you might prefer to opt for more investment on bond-like investment as too much stock-like investment will create uneasy feeling.  Of course, for an agreesive investor, the scenario will be the other way round.

 

Now, the key here is how much to allocate to each investment class.  A number of fund houses have their own model on fund allocation for their clients and it is hard for us to observe a standard.  Here, I would like to suggest to follow the father of value investing, B. Graham, suggestion.  Graham suggests that, no matter which kind of investor you are, you should at least first allocate 25% of your fund in bond investment and 25% of your fund in stock investment at all time.  By doing so, you have allocated 50% of your fund.  For the balance of 50%, simply allocate it based on your risk profile.  Graham does not mention how to but I suggest you could do it as follow:

 

1. For conservative investors: allocate the balance 50% into bond to make it a total 75% allocation in bond investment with 25% allocation in stock investment
2. For balance investors: allocate another 25% into bond investment and 25% into stock investor to create a 50:50 portfolio
3. For agreesive investors: allocate the balance 50% into stock to make it a total 75% allocation in stock investment with 25% allocation in bond investment

It is important to rebalance your portfolio from time to time so that the overall allocation is within your risk tolerance level.  As for the frequency of rebalancing, I suggest to do it at least once every six month.  Of course, should there is any changes over market condition, it is fine should you decide to change your fund allocation.  For example, you may opt for 75% investment in stock when the market is on its bull run while change your exposure to 75% in bond when the market is bearish.

 

Do pay attention that Graham's suggestion on least first allocate 25% of your fund in bond investment and 25% of your fund in stock investment at all time.  This is a strategy on market exposure rebalancing.  Logically speaking, bond and stock market are negatively correlated.  Therefore, at least 50% of your fund is well hedged against any kind of market condition while the balance is subject to your judgement and understanding.

 

You might wonder should you go into stock or bond market directly.  You could proceed for direct investment if you know what you are doing.  For stock investment, according to Graham, years of historical data show that passive index funds are able to outperform those managed funds.  This is because no fund house could guarantee beat the market at all time.  Furthermore, the initial and management charges by managed are just too high that will not generate any good to our investment return.  Therefore, Graham suggests that we could consider to park our stock investment fund at index funds by exercising dollar-cost-averaging.  He further proposes that you could allocate up to 10% of your stock investment fund into direct stock investment if you wish.  To me, you should not limit yourself to this rule strictly if you know what you are doing.  My past experience shows that my direct stock investment has been very much outperform than those index funds.  Therefore, I have no doubt on my direct stock investment and I will allocate more fund for direct stock investment, just like what I am showing in my course.

 

As for bond investment, due to huge initial outlay requirement, I believe bond fund is a better option to us.  Similarly, dollar-cost-average method should be exercised as well for bond fund investment.

 

I hope this post could provide you a clearer picture on how to effectively allocate your investment fund for better return with well managed risk.

 

Good luck :)