Monday, 6 July 2015

Asset Allocation Strategy

For simplicity, I will only look at Cash and Stock rebalancing, neglecting my bond/bond-like instruments.


Using STI ETF as reference
Cash
Stock (capped at)
≥ 5 years historical high
90%
10%
10% dip from highest
80%
20%
15% dip from highest
75%
25%
20% dip
60%
40%
30%
50%
50%
40%
30%
70%
50%
20%
80%
>50%
10%
90%

This will not be 100% possible due to market fluctuation and opportunities to buy, hold and sell stocks. However, this served as an ultimatum to be balanced.

Question: Which company to invest during the dip?

I will be looking at companies that dipped more than STI ETF as it could reflect a possibility of overselling by pessimistic market sentiments. Another good purchase opportunity will be new entrant with growth potential. Last but not least, companies with undervalued stocks are good buy too. All in all, the asset re-balancing should not exceed the equity cash value capping.

Question: How do I ensure the dip is due to market sentiments, and not deteriorating companies’ fundamentals?

Companies that dipped along with STI ETF may also signify other major problems. I will be ensuring that I do my due diligence to buy only companies with good fundamentals.

Question: Do I have to sell whenever market sentiments get better?

Once purchased, I will have no intention to sell any of them unless their fundamentals worsen or they are overvalued.

Question: By not selling, how do you re-balance your asset allocation?

For example, if I am 80% invested when market dipped at 50%, thereafter, the market rise to historical high within 5 years. My portfolio will then become lopsided to maybe, 90% equity and 10% cash.

Since I have exceeded the equity capping due to market appreciation, the stocks I have purchased are at much lower prices. This means I can afford to hold for long terms and enjoy more capital appreciation and dividends pay out. As a guide, stock market tends to go higher in the longer run, and we will not be able to know when this will happen. From this point, I will not add on new stock and pay more attention to hold and sell opportunities. The ultimate objective is to maximise returns and have a reasonable safety net. 

Quote from Charlie Munger -
The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of it’s competitive advantage. Look for more value in terms of discounted future cashflow than you are paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favour. We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.

Question: How about rights issue if I have reached equity capping?

Ideally, I should be leaving 5% buffer for such scenarios.

Question: As I am building my stock portfolio from scratch again, if the market don’t dip, does that mean I will never buy?

As I have en-cashed all my profits earlier, I don’t own much stocks now. However, I believe stock market is cyclical. If the market keep on going up, you just need to be patience. It can be 5 years or 10 years and I could have missed a lot of boats. So be it. Just take this opportunity to prepare my data and accumulate my warchest. Once the opportunities are here, I will make sure I use my precious cash and data to great use. It is easier to pluck low hanging fruits. Having say that, buy opportunities are always available. For example, new entrant with growth potential or undervalued stocks.
Quote from Charlie Munger - If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.

Conclusion

This is my first step towards a more active investment portfolio. I will not rush into the stock market without an investment strategy. I rather missed the boat than risking losing my capital without convincing calculated risk. This is me. I have no qualm about holding excessive cash if need to. I will always resort to higher yield cash instruments like OCBC 360, Fixed Deposit or 5 years bonds. Upcoming, there will be Singapore Saving Bonds. Having said that, I still target 6% average yearly returns. All I need is a good entry point into higher yield opportunities. I believe when opportunities arise, I will have the courage to act. Quote from Charlie Munger : Extreme patience combined with extreme decisiveness.

Next step, it will be working on stock analysis to decide on buy, hold and sell.

My last famous quote from Charlie Munger : It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

Frugal Daddy

4 comments:

  1. Hi Frugal Daddy

    I really like your strategy here. It looks like you have a planned sort out thoughts of what you are going to do at specific point in time. The harderst part to is is sticking through the strategy thick and thin.

    I also often have friends who stayed on the sidelines too long that they then ignore the markets and lost interest on investing completely on it. I think if we are able to sharpen our skills during these periods, then when opportunities arise, we'll be better able to pounch on these chances (than staying idle).

    ReplyDelete
    Replies
    1. Hi B,

      I agreed that staying invested is a good thing, that why I allocate 90/10% even in historical high level. Staying with plans without being affected by emotions are challenging. Thanks to you, I am diligently preparing my data to look for opportunities.

      I believe when the opportunities arise, I will act. We shall see :)

      Delete
  2. Wow!

    That's what I call pressing the reset button and locking in most of your paper profits!

    Well, when others are tearing their hair out if their portfolios got a 50% hair-cut, you'll be there picking up bargains in the street.

    Hope you're not squeamish at the sight of blood ;)

    ReplyDelete
    Replies
    1. I really hope that day can come soon. I have been idling too long. haha.

      Delete