Asset Allocation

Dear Mr. Tan,
I read a comment in the blog from someone who said that a long term investor should look at asset allocation, which accounts for most of the yield. Can you explain this concept?

REPLY
Asset allocation means choosing the class of assets to invest in. The main classes are:
a) Equity
b) Bonds
c) Property
d) Cash

Within each class, there are sub-classes to choose from, e.g. different markets or sectors.

If you are focusing on asset allocation, you are giving less emphasis on stock selection, i.e. choosing the specific shares or bonds within the sub-class. You can invest in a fund that is invested in many shares or bonds within the sub-class. This is called diversification.

For a long term investor, the yield on equity is higher than bonds. I advice long term investors to invest in equities and ride out the volatility, i.e. average out the good and bad years.

Read this FAQ to get some information about the long term yield on various asset classes:
http://www.tankinlian.com/faq/savings.html

For my long term investments, I prefer to invest in Singapore equities, e.g STI ETF or in global equities, e.g. S&P 500. The S&P 500 are the largest US companies, which have global operations. I prefer indexed funds, as they have low charges.