In today’s financial marketplace, a well-curated portfolio is vital for any investor’s success. As an individual investor, you need to know your own financial goals and the proper asset allocations that give you the best odds of achieving them. There has always been this golden rule where the allocation of shares in your entire investable portfolio is based on your age. For example, if you are 27 this year, then 73% (i.e. 100 – 27 = 73) of your portfolio should be in shares. However, that’s just an oversimplification: The construction of a proper portfolio shouldn’t be based on such…
In today’s financial marketplace, a well-curated portfolio is vital for any investor’s success. As an individual investor, you need to know your own financial goals and the proper asset allocations that give you the best odds of achieving them.
There has always been this golden rule where the allocation of shares in your entire investable portfolio is based on your age. For example, if you are 27 this year, then 73% (i.e. 100 – 27 = 73) of your portfolio should be in shares.
However, that’s just an oversimplification: The construction of a proper portfolio shouldn’t be based on such simplistic rules. In fact, if everyone would list out their estimated financial needs (for instance, wedding-related expenses, household renovation fees, and required monthly income when in retirement), it’s likely that the amounts will differ greatly between each individual.
That’s just one example of how each individual’s portfolio of investments has to be unique to their own personal situation. Here are some general, but essential, considerations you have to think about for your own customized portfolio.
Financial goals will change with the passage of time. For example, when you are young, you may not have many dependants to take care of; you’d have no kids, and your parents are likely to be healthier than in say 30 years’ time. Thus, whatever savings we have can be channeled toward investment vehicles which can generate higher returns, like shares.
On the other hand, if you are approaching retirement, your potential to earn income in the future from active work would likely diminish. The retirement nest-egg you have built in the past is probably what you can draw down from. Inevitably, this entails to much lower risk-taking.
2. Risk profile
Different people react and manage risks in different ways. Some may be ultra conservative while others may be super aggressive (like me when I was younger!). Thus, it is vital to match your own risk tolerance levels to suitable investments as each investment would carry with it a different risk/reward profile.
3. Specialised knowledge
I would like to put across this point through a quote from Warren Buffett:
“Risks comes from not knowing what you are doing”.
Here’s an example of this. If you can’t tell your tugboats and support vessels from your sampans, then it’s probably a poor idea to invest in companies like Ezion Holdings (SGX: 5ME) or Pacific Radiance (SGX: T8V). The former owns a host of different offshore assets that provide support services to the oil & gas industry; some of its assets include multi-purpose self-propelled jack-up rigs, tugs, and ballastable barges. Meanwhile, Pacific Radiance is also in a similar type of business and its vessel fleet includes ocean tugs, offshore barges, and anchor handling tug supply (AHTS) vessels, amongst others.
If you don’t understand the assets the two companies own, there’s even lesser chance you can tell whether their businesses are strengthening or weakening by the day. That is risky.
However, if you have gained good knowledge about any particular industry due to your line of work, you would have a competitive advantage over others as you’d be in a better position to assess the strengths and weaknesses of companies in the industry. This would thus make a suitable portfolio of shares for you – assuming you’re part of the oil & gas industry – very different from someone who’s been, say, in the biotechnology scene.
To reiterate, each individual’s portfolio of investments should align with their own unique personal situation (which can include different financial needs, risk tolerance levels, and specialised knowledge). A good portfolio would have to be consistent with all those variables.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.