Building a Portfolio
- 1. Your Financial Wellbeing Workshops Keith Tan
- 2. DISCLAIMER This information contained within this presentation has been obtained from sources that author believes to be reliable and accurate but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information. Neither the author nor any of his associates, nor any director, officer or employee of his company accepts any liability whatsoever for any loss arising directly or indirectly from any use of this presentation. The presentation is being made available to you solely for your information only. It does not have regard to your specific objectives, financial situation and particular needs.This presentation is not intended for distribution to any other person.The information in this presentation may not be reproduced in whole or in part without the prior written consent of the author.
- 3. KEY LEARNING OUTCOMES • Understanding your risk tolerance • The Risk-Return Relationship • Principles behind diversification • Strategies to use in portfolio management
- 4. BUILDINGYOUR PORTFOLIO THE ‘ROAST’ METHOD RiskTolerance Determine your level Objective Decide on your returns Asset mix Determine your STrategies Implementation
- 5. BUILDINGYOUR PORTFOLIO THE ‘ROAST’ METHOD RiskTolerance Determine your level Objective Decide on your returns Asset mix Determine your STrategies Implementation
- 6. RISKTOLERANCE High RiskToleranceLow RiskTolerance Choose Less Risky Portfolio Can Afford a More Risky Portfolio
- 7. RISKTOLERANCE • What determines your level of risk tolerance? Willingness to take risk Ability to bear risk Risk Tolerance Your nature Your objective
- 8. RISKTOLERANCE • How to determine your willingness to take risk? ! Strongly! disagree! Tend!to! disagree! Tend!to! disagree! Strongly! agree! Investing!is!too!difficult!to! understand.! ! 4" 3" 2" 1" I!am!more!comfortable!putting! my!money!in!a!bank!account! than!in!the!stock!market.! ! 4" 3" 2" 1" When!I!think!of!the!word!“risk,”! the!term!“loss”!comes!to!mind! immediately.! ! 4" 3" 2" 1" Making!money!in!stocks!and! bonds!is!based!on!luck.! ! 4" 3" 2" 1" In!terms!of!investing,!safety!is! more!important!than!returns.! ! 4" 3" 2" 1" " Total!score:!!______________! Source: Grable and Joo (2004)
- 9. RISKTOLERANCE • How to determine your ability to bear risk? • Time Horizon LongerTime FrameShorterTime Frame Less ability to bear risk More ability to bear risk
- 10. RISKTOLERANCE • How to determine your ability to bear risk? • Income Needs Returns are a bonus Returns are needed for expenses Less ability to bear risk More ability to bear risk
- 11. RISKTOLERANCE • What determines your level of risk tolerance? Low High Low Lower risk tolerance Education or resolution required High Education or resolution required Higher risk tolerance Ability to bear risk Willingnesstotakerisk
- 12. BUILDINGYOUR PORTFOLIO THE ‘ROAST’ METHOD RiskTolerance Determine your level Objective Decide on your returns Asset mix Determine your STrategies Implementation
- 13. RETURNS OBJECTIVE Risk free rate? Realistic? Returns Objective Inflation rate?
- 14. BUILDINGYOUR PORTFOLIO THE ‘ROAST’ METHOD RiskTolerance Determine your level Objective Decide on your returns Asset mix Determine your STrategies Implementation
- 15. RISK / RETURN RELATIONSHIP Expected Return Risk
- 16. RISK / RETURN RELATIONSHIP Expected Return Risk Bank Deposits Bonds Stocks Commodities Properties Not so well- defined in real life
- 17. ACTUAL RETURNS CAN BEVERY DIFFERENT! Return Risk Stocks Stock A Stock C Stock D Stock B
- 18. INTRA ASSET DIVERSIFICATION Return Risk Stocks Stock A Stock C Stock D Stock B Diversified portfolio of Stocks A, B, C and D
- 19. WHY DIVERSIFY?
- 21. WHY DIVERSIFY? Expected Return Risk 100% Asset B 100% Asset A 50% A 50% B ρ=-1 ρ=0 ρ=1
- 22. WHY DIVERSIFY?
- 23. BUILDINGYOUR PORTFOLIO THE ‘ROAST’ METHOD RiskTolerance Determine your level Objective Decide on your returns Asset mix Determine your STrategies Implementation
- 24. PORTFOLIO MANAGEMENT STRATEGIES • 100 minus age principle • Your current age - the percentage to be invested into bonds (e.g. 30%) • 100 minus age - the percentage to be invested into stocks (e.g. 70%) • More for retirement purposes • Consider your risk tolerance level
- 25. PORTFOLIO MANAGEMENT STRATEGIES • Allow for Tactical Allocation Cash Endowment Endowment Bond Fund Bond Fund Stocks Property Equity Fund Gold / Silver HY Bond Fund HY Bond Fund
- 26. PORTFOLIO MANAGEMENT STRATEGIES • Allow for Tactical Allocation • Strategic allocation ratio is determined based on your risk tolerance and time horizon. (e.g. 70% stocks, 30% bonds) • Tactical allocation allows for minor form of market timing based on market outlook. • e.g. in a year close to peak of market cycle, can tactically adjust allocation to 50% stocks, 50% bonds.
- 27. PORTFOLIO MANAGEMENT STRATEGIES • Portfolio Rebalancing • Have a desired asset allocation ratio (e.g. 75% equity, 25% bonds) • Periodically maintaining this ratio by • selling off assets which have relatively appreciated • buying assets which have relatively depreciated • Disciplined strategy of buying low, selling high regardless of market sentiment
- 28. BUILDINGYOUR PORTFOLIO THE ‘ROAST’ METHOD RiskTolerance Determine your level Objective Decide on your returns Asset mix Determine your STrategies Implementation
- 29. CASE STUDY You have just received a bonus of $20,000. You do not have any short term need for the money so you decide to invest the money for the next 10 years. (1) Determine your risk tolerance level. (2) Decide on your return objective. What is your target annualized return for the next 10 years? (3) Determine the appropriate asset mix that is congruous with your risk tolerance and return objective. Your mix can consist of cash (fixed interest of 1% p.a.), stocks, bonds and gold. (4) Decide on an appropriate strategy that you would like to employ.