If you are one who will work your whole life to save enough money for your retirement, then you might need to understand asset allocation. This is also a common practice among those who invest.
What is asset allocation really?
Basically, asset allocation is an investment strategy. It helps you to find the balance between the risk and returns of your assets (investments). This however would be ideal if you have built up your wealth to a certain level (usually from a six-figure amount). If you haven’t reached that level, you should first try to get there. Setting your allocation depends on several factors such as your risk appetite (and tolerance), investment prospects as well as your individual goals.
What assets are involved?
In general, there are 4 types of assets that people invest in which include:
- Cash – This refers not only to what you have on hand. It covers the money you have in your bank accounts (savings, Fixed-Deposits, etc). Never underestimate the influence of having cash as it could determine your maneuverability in moving your assets around.
- Stocks – These are the assets that you would have bought and kept over the years. Check the current market value and then conclude the amount. There could be stocks that you bought years ago which were worth much more than while some others would be the opposite result.
- Provident Funds – In Malaysia, the EPF is the default fund for those who are working. Over the years, EPF has built its reputation and assets to more than RM1 trillion. It is by far the most stable and consistent when it comes to returns (averaging around 5-6% per year).
- Properties – Perhaps the most stable type of asset you could invest in, real estate gives you the space to build your net worth for the long term. It is common to find property owners using rental income to pay their installments.
So, how can asset allocation work for you?
As mentioned, you should build your net worth to 6 figures (starting from RM100,000). This is where you should be ready to then diversify your personal wealth. The main idea here is to ensure that you are financially stable and robust. An acceptable level for a normal investor should be:
- 15% in Bonds and Funds
- 10% in Cash
- 30% in Properties
- 45% in Stocks
However, do take note that if you are planning to work your way to this level, it would be more manageable if you increase the percentage in Cash as you want to reach the 6-figure point faster. As you move closer to your target, you can reduce your commitment to savings and put your focus on other areas such as properties or stocks.