Investment Strategy 2

After you understand your investment strategy and your risk profile, the next step to do is to plan your asset and currency allocation.

Assume that your investment style is moderate, you are in mid twenties and you do not have immediate requirement for your cash, you can invest in a balanced portfolio. You can consider the following allocation: 50% in cash, 30% in equities and 20% in alternatives (ie commodities etc. They are considered alternatives as they typically have a negative correlation with equities.) Even if equities drop 30% and alternatives drop 30%, the overall impact to your portfolio will be a 15% drop (30% x 0.3 + 20% x 0.3). Cash should not drop much, esp if your cash is in the same reference currency. This means that if you are a Singapore resident, your reference currency is likely to be SGD and you should put the bulk of the cash in SGD to reduce currency exposure.

Currency exposure is a double edge sword. If you utilize it well, you can increase your return on your portfolio.

To give you an example, if you are a SGD reference with a portfolio of 100K, and your asset allocation is 50% in cash, 30% in equities, 20% in alternatives. It may look fairly defensive as the bulk of it is in cash. However, if I tell u that the whole portfolio is denominated in AUD, then there will be a cause of concern. Without doing anything, your portfolio will have dropped about 24% year to date as AUDSGD has dropped from around 1.31 at the start of 2008 to 0.95 as of now. Conversely, if the whole portfolio is denominated in Swiss Franc (CHF), then your portfolio will have appreciated by around 4% year to date, based on currency gains alone. As such, currency allocation is important too.

For a truly diversified or defensive portfolio, the portfolio has to be diversified in terms of currency and asset allocation.

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