Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Saturday, 20 December 2014

Asset Allocation VS Investment Period

Most investment professionals would emphasize that a good asset allocation is key to great investment returns. Having a portfolio consisting of stocks, bonds, other investment assets and cash is like the safest strategy anyone of any age group can follow.

Today, I wish to offer something different. I would like to say that the Time Horizon you have to invest is equally important as to what you invest in.

Based on the video below by Fisher Investment, stocks tend to perform better than bonds over a long period - despite the higher volatility (price movements).

If you are planning for a retirement 30 years later, putting your investment into 100% stocks makes more sense than to have a portfolio consisting a mixture of stocks and bonds. This is simply because  over long periods, stocks are more positive than not, and provide better returns than bonds or mix.

Compare the above scenario against if you are going to retirement in 3 years time. You might not wish to have periods of high volatility during this period, thus you might wish to skew your portfolio towards more bonds.

Thus, it is not just Asset Allocation that is important, your Time Horizon is equally important!
Do not neglect that part of your portfolio!

Just in case you think stocks are risky, below is the price chart of the S&P 500 from 1950 till 2014.
It is a rising trend. You might wonder "how can anyone lose money on this?"
In fact, a lot people did lose money, because they tried to trade in and out instead of buying it and holding it throughout the whole journey.
If you bought during 1956 at price of $45.35, it is worth nearly $2070 today!
Now that is an investment!

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