Asset allocation key to investing in volatile market

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 25, 2018 - July 01, 2018.
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Investors should utilise a proper asset allocation strategy for their portfolios to protect themselves from the turbulence in the global markets, which is expected to continue, says Phillip Capital Management Sdn Bhd chief strategist Phua Lee Kerk.

According to him, some of the possible market-moving events in the future include a trade war instigated by US President Donald Trump and the direction of the new Malaysian government.

“How can you time the market unless you are a machine that can spend 24 hours without sleeping? That is why you need to ignore some of the market noises,” Phua said during his presentation, “The proven long-term sustainable performance in your investment”, at the 2018 Harveston Wealth Management Conference.

Instead, investors should plan their asset allocation strategy properly, he says. In their portfolios, there should be different asset classes that can help reduce the risks associated with any single asset class. “When we talk about asset allocation, the definition is to reduce the volatility in the short term and try to minimise or reduce the fluctuation of your asset value,” says Phua.

There are many asset classes available in Malaysia, ranging from money market funds to bonds. Different asset classes move independently of each other and have different characteristics. When they are put together in a portfolio, they will serve to either enhance returns or diversify risks, says Phua.

Money market funds have the lowest risk but the lowest expected returns, followed by local bonds, foreign bonds, real estate, local stocks, foreign stocks and, finally, commodities, which have the highest risk but also the highest expected return, he adds.

Empirical studies have shown that portfolio performance is mostly determined by proper asset allocation. In a study published in the Financial Analysts Journal that is cited by Phua, asset allocation accounts for 91.5% of portfolio performance, followed by security selection (4.6%) and market timing (1.8%).

Despite the influence of asset allocation on performance, it will not give investors the highest returns in the market, he says. A proper asset allocation strategy will give investors steady returns and protect them from the volatility in other asset classes.

“The key part of making investments is the time you are in the market and not the timing of the market. This means you must be in the market long enough to see what you want to get,” says Phua.