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Important Information
Chocolate Finance is a brand of Chocfin Pte Ltd (UEN 202347190R). Chocfin Pte Ltd is licensed by the Monetary Authority of Singapore to perform fund management activities. Please note that all investments involve risk, and the 4.2% return is currently supported by a promotional ‘Top-Up Programme’, valid during the Qualifying Period and subject to terms and conditions. This does not guarantee future returns or capital.
Disclaimer
This advertisement was prepared without considering your specific investment objectives, financial situation, or tax needs and does not constitute financial advice. Before applying, carefully consider whether this product or service is suitable for you. This advertisement has not been reviewed by the Monetary Authority of Singapore. We may receive an affiliate/referral fee when you sign up for services/products on this site.
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Investors of any age would do well to revise their current portfolios when they take age, risk appetite, retirement goals, understanding and correlation to other assets in the portfolio into consideration.
The rise of fintech now adds alternative assets like peer-to-peer lending, cryptocurrencies and microloans to the sheer variety of investment options. No longer do investors contend with just commodities, stocks, bonds and real estate.
Investors who accept that there isn’t a one-size-fits-all solution to building a diversified portfolio stand to do better. Here are general principles on finding the asset class that’s right for each investor portfolio.
1. Age and investment horizon
Assets behave as they should when given the time to do so. For example, it’s a well known saying that stocks outperform bonds; which is more likely to be true over a longer investment horizon.
Stocks will almost certainly outperform bonds over the next 30 years, for example, as fundamental facts like inflation make this outcome the most probable. But no one knows for certain if stocks will outperform bonds next year, or the year after, especially with the current Sino-US trade war.
As such, when considering the performance of any asset class, it is important to understand that the more time you give it, the more likely the asset will perform as expected. Wealth managers may tell clients to reallocate from equities to bonds when they get older.
In general, older investors will want to favour fixed income securities, be they perps or simple annuities, while younger investors can be more aggressive. Given their longer investment horizon, younger investors can pursue long-term capital gains, and expect their assets to behave more or less planned.
2. Financial goals, risk appetite and capacity
Personal financial goals is as much about psychology as mathematics. An asset class must meet the risk appetite, or “sleeping point”, to prevent stress or impulsive moves.
For example, there may be many good reasons why cryptocurrency fits a particular investor’s portfolio. She is young, affluent, and such an investment would make up only 5% of her portfolio. But if she is risk-averse and uncomfortable with volatility, the sleepless nights and stress may outweigh the value of the asset, regardless of what the numbers suggest.
If the risk is beyond the investor’s appetite, there is also an increased likelihood that an investor will derail their long-term financial goals. A news report on falling cryptocurrency prices, for example, could set off a panic that results in offloading the asset and incurring a loss.
In general, monthly obligations, inclusive of a home mortgage and premiums for an endowment plan, should not exceed 40% of an investor’s monthly income. Any asset class that pushes beyond this limit is likely taking them past their risk capacity.
3. How the asset class fits within quantified retirement goals
When deciding to invest in an asset class, investors should have quantifiable goals and ways to measure outcomes.
For example, an investor should have a clear idea on how much they need by the age of 65 to retire, with an income replacement rate of at least 80%. Only then is information about an asset class’ historical returns useful.
Investors should also note that every asset class rises in value over time. They need to ensure the returns are sizeable and fast enough to meet quantified retirement goals.
Some examples include microloans tailored towards invoice financing for small businesses. These commit capital for terms of at most 12 months, which limits what investors can lose while ramping up returns to make up for the shorter investment horizon. Late starters with 20 years or fewer to retirement, can consider these alternatives to conventional assets, such as stocks or bonds.
4. Education and understanding of the asset
Investing in a poorly understood asset means ignoring risk appetite, as the investor tends to overestimate or underestimate the risk involved. Without proper education and understanding of the asset, there are also important subtleties within asset classes that investors may miss.
For example, investing in peer-to-peer lending is often perceived as being high risk. But this varies greatly based on the jurisdiction and platform. While China is struggling with it as a shadow banking problem, peer-to-peer lenders in Singapore and Malaysia have seen default rates of less than 1%, even lower than the default rate suffered by some commercial banks.
Many investors in Exchange Traded Funds (ETFS) may have also ignored that a partial replication ETF does not include smaller stocks by market cap. In the event of a small-cap led bull run, this can result in the ETF yielding lower returns than the benchmark.
5. A low correlation to other assets in the portfolio
Before introducing a new asset class, it is best to confirm that there is a low correlation to other assets in the portfolio. Strong correlations might mean a lack of diversification.
For example, an investor who already owns commercial retail properties might reconsider investing in a commercial Real Estate Investment Trust (REIT) that is heavy on malls. A downturn in the retail industry would impact both the REIT and real estate.
The correct mix of assets varies for each individual. But as a near-universal principle, investors should avoid banking too heavily on the same interlinked group of assets. A qualified wealth manager should be consulted on the right mix for each portfolio.
Looking beyond conventional assets
For a truly diversified portfolio, investors should think of asset classes beyond stocks, bonds and real estate. The emergence of fintech has given rise to peer-to-peer loans and microloans which offer unprecedented opportunities for high growth in a low interest rate environment.
Some new asset classes are also structured in a way to mitigate risks found in conventional assets, such as long maturity periods, opaque structures, and high initial cash outlays.
By taking various factors into serious consideration, investors of any age would do well to revise their current portfolios and look for new alternatives that can complement or replace older asset classes.
About the contributor
X.Y. Ng is VP, Brand and Digital at Validus Capital, a leading growth-financing fintech platform that connects accredited investors with growing SMEs across Southeast Asia.
Wealth Management Services used to be exclusive to the people who are insanely rich. These people were expected to pay at least 1% of the value of their assets as fees. Many wealth managers charge more than this! This is why these services leave no room for small-time investors.
Traditional wealth managers provide tailorized advice on financial matters such as investments, retirement, taxes, and estate planning. You must keep up with your annual fees to reap these benefits. However, a new wave just hit the country! Several FinTech (i.e., Financial Technology) companies have digitalized wealth management services.
These digitalized wealth managament services make use of “robo-advisors”, which allow all sorts of clients to build a portfolio at a cheaper rate. Robo-advisors measure your risk appetite and diversify accordingly. The gradual growth of robo-advisors is seen around the globe.
Know more about robo-advisors by watching this short video:
The local FinTech companies that I mentioned above include Bambu and Smartly. Let me kick off with Bambu. Bambu chose the B2B (i.e., Business to Business) route in marketing their robo-advisory platform. This means that they offer their services to the financial institutions themselves.
Ned Philips, the brainchild and CEO of Bambu, believes that the quick rise of digital adaption will greatly benefit the consumers. He explained that it may cost his company US$1 million (S$1.45 million approximately) to acquire 3,000 customers. The low fees that robo-advisors charge make it possible for him to sustain the business.
Smartly, on the other hand, allows its clients to invest in internationally diversified portfolios. The company offers ETFs or Exchange-Traded Funds. You can invest for as low as S$50 per month. You read that right! Their fees are very affordable!
Clients or investors are mandated to provide basic information about themselves. Then, Smartly’s proprietary algorithms will suggest a personalized portfolio based on the profile. It is possible to change the allocations of the funds if the client does not agree with it. Its mere slogan will say it all: “Anyone can be an investor – an investment service built for you.”
In summary, robo-advisors allow you to create a portfolio on autopilot. The digital algorithms access your tolerance to risks and your preferred timeline. Afterwards, a portfolio will be built. It is undeniably cheaper than the traditional wealth management services. This is why it welcomes more and more small-time investors to open their accounts.
Image Credits: pixabay.com
Do you think that this will benefit the Singapore market? Well, I hope so!
Singapore is one of the world’s leading countries in commerce and finance, as well as having been recently voted the top country for expats by HSBC. In fact, it is also the top voted country in the world for starting up a business because of the support available for entrepreneurs and their SMEs and SMBs. Added to that is the Singaporean work ethic and the success of financial tech companies currently holding offices there. It’s really no wonder that some of the biggest names in the world are setting up on the island.
Whilst recent years have seen a proliferation of tech companies across the world, there are some industries which are successfully thriving in Singapore. These include but are not limited to those listed below.
IT Services
Whilst this is a broad term for a huge umbrella of industries, there are some information tech services which are thriving more than others within Asia’s finance hub. For example, Twitter has headquarters in the city, a chain of international success stories such as Apple, Google and Microsoft have invested in offices, with Netflix opening their Asia division in Singapore next year. App creators and developers, cloud storage and cybersecurity are some of the divisions of tech which are really booming now.
The Singapore government knows and supports the value of tech industries and launched Smart Nation – an initiative to empower citizens through the use of tech and pervasive accessibility, to encourage growth in this key industry.
Automotive
Having pumped some serious money into R&D recently, the Singaporean government have encouraged experts from all over the world to research and develop all industries. One of the major players is the automotive industry, both Delphi and Bosch have set up R&D departments for the industry. With a workforce enriched with electronics and engineering, it is unsurprising that the automotive industry is racing to the forefront of successful sectors in Singapore.
Healthcare/ Biomedics
Again, the country’s provision for R&D makes Singapore a thriving hub of healthcare and many big pharma companies have offices in the city. SMEs from the medtech sector have been sprouting up all over Singapore, using the excellent support and resources to incubate their ideas before spreading to the whole of Asia. This means the markets in this area are very successful too, rendering it a solid investment.
Creative industries and arts
With the amount of tech developments happening within the country, Singapore is awash with creative agencies offering design services, game creation and development and animation to name just a few. The Singaporean government expect to see more of these companies as we head into 2017.
Arts and performing arts are respected in Singapore and have seen a steady increase in recent years, making it a cultural place, nurturing cultural interests.
Communications
Its thriving tech opportunities, educated workforce and the desire to be independent and self-sufficient have led to a proliferation of communications companies springing up throughout Singapore. From telecommunications to information marketing and internet comms. companies, the tech advancement in Singapore lends itself well to the ever expanding communications industry.
