[ASSET ALLOCATION] HOW TO MAKE DIVERSIFIED INVESTMENTS THROUGH ASSET ALLOCATION
Faced with market volatility, if your portfolio is too focused on certain industries or stocks, you may be at greater risk of volatility. As such, sound asset allocation and diversification of investments are crucial, which can help you maintain stable investment performance in different market environments.
What is Asset Allocation?
AT THE HEART OF ASSET ALLOCATION IS DIVERSIFIED INVESTING, ALLOCATING DIFFERENT INVESTMENT PRODUCTS INTO PORTFOLIOS TO CONTROL RISK. But for novice investors, they may not yet know much about how to choose the right portfolio.
Asset allocation can be achieved through ETF diversification
ETFs can help investors achieve asset allocation, rather than just investing in individual stocks, reaching risk diversification. The ETF's portfolio includes a variety of investment products such as stocks, bonds, commodities, and money market instruments. When an investor buys the ETF, it is practically all the products in the portfolio at once, making it easy for even novice investors to get started. ETFs can be traded on exchanges and are traded in the same way as stocks, and prices are instantly variable and publicly transparent. Investing in an ETF will require less capital than investing in a single stock or other investment product.
How to allocate assets for diversified investments?
With ETFs we can find different portfolios more easily, but how should we determine the share of each portfolio of packaged investment products?
We can refer to how assets are allocated to large investment institutions or well-known investors.
60/40 Portfolio (60/40 Portfolio)
60/40 Portfolios: Classic Portfolios Ideal for Beginners
The Classic 60-40 Portfolio is a simple to understand asset allocation strategy that is especially suitable for novice investors. The basic concept is to achieve diversified investments by allocating 60% stocks and 40% bonds, while reducing investment costs and recommending long-term holding.
When 60% of funds are invested in stock ETFs, potential growth gains can be obtained, while allocating 40% of funds to bond ETFs effectively disperses the risk of stock market falls.
But we also need to realize that the market is constantly changing. Since the 60/40 combination was earlier proposed, many investors believe that the combination is no longer suitable for the current market. They optimize their portfolios by adding more asset classes or adjusting their holdings.
How to Set Up a 60/40 Investment Portfolio
Permanent Portfolio
Stable and simple portfolio
Before understanding this combination, you can ask yourself three questions:
Would you choose the right stock based on the different economic environment?
When the stock price falls, can you rationally analyze and buy stocks at lows?
Do you have the patience to hold stocks for the long term?
If your answer is no, this portfolio might suit you.
Permanent Portfolio refers to maintaining stable returns and risk control regardless of how the economic environment changes.
A permanent portfolio typically divides funds into four parts, namely:
25% Stocks: In Pursuit of Growth
25% Long-term Treasury Bond: to provide stable fixed income
25% GOLD: TO COMBAT INFLATION AND CURRENCY DEPRECIATION
25% Cash (can be replaced with short-term Treasury Bonds/Currency Funds/Fixed Deposits): To maintain liquidity and respond to market fluctuations.
Whether it is a bull market or a bear market, there are suitable investment products for different economic cycles, such as stocks during the expansion period, and gold in the inflation period. Averaging funds to each asset class can, in the long run, achieve the goals of diversifying risk, reducing retractions, and stabilizing returns.
But with stocks holding only 25%, if investors are in a long-term bull market, the probability of a permanent portfolio will be less than that of a 60/40 portfolio.
HOW TO CONFIGURE A PERMANENT PORTFOLIO
All Weather Portfolio
24/7 Portfolio: Adapt to each economic cycle
Before the advent of the All Weather Portfolio, most investors followed a 60/40 asset allocation. However, when the economy goes down, this portfolio may lack risk resistance, so the All Seasons Portfolio has emerged.
Ray Dalio, founder of the world's largest hedge fund, Bridgewater, has found that the speed of economic growth and inflation have the greatest impact on the economy through long-term observation and research on the market. According to these two elements, there are four types of market conditions, namely:
The economy is growing too fast
Economic growth is too slow
Inflation higher than expected
Inflation lower than expected
Based on these four scenarios, it is possible to filter out assets that perform better under appropriate market conditions and balance them based on market volatility. For example, stocks often outperform when economic growth exceeds market expectations; and Treasury bonds perform better when economic growth is lower than expected. Gold, etc. will perform better when inflation is higher than the market expects; on the contrary, when inflation is lower than expected, stocks (especially growth stocks) will perform better. This allows both to better control risks and to ensure the stability of combined returns.
Dalio's theory of risk parity
Dalio's theory of risk equalization is primarily based on volatility (risk) for asset allocation, rather than simply relying on capital to balance. In general, we allocate assets based on capital ratios, but Dalio believes that we should adjust the holding ratio based on the volatility of each asset class.
For example, assuming a stock has 10 times the volatility of Treasury bonds, the holding ratio of bonds should be 10 times that of stocks, so that the two can be balanced on risk.
By following this allocation logic, you can control risk more effectively and ensure stable returns on your portfolio. This theory is the so-called “risk aversion” theory. Based on this concept, Dalio created the corresponding quadrilateral grid.
How do I build a 24/7 portfolio?
A 24/7 portfolio will typically have the following configurations:
30% - Stocks (mainly US stocks): Pursuit of growth.
40% - Long-term Treasury Bond: Provides stable fixed income.
15% - Medium-term Treasury: Provides higher liquidity and relatively stable yields compared to long-term Treasury bonds.
7.5% - Gold: Against inflation and currency depreciation.
7.5% - COMPOSITE COMMODITIES: INCLUDING CRUDE OIL, AGRICULTURAL PRODUCTS AND METALS, WHICH PROVIDE HEDGES IN THE EVENT OF INFLATION OR SUPPLY CHAIN ISSUES.
Compared to a permanent portfolio, the all-weather portfolio has a greater variety of asset classes, but similar investment objectives. While these combinations can effectively disperse risk, the rate of return may fall short of other more aggressive asset allocation strategies. Both combinations are suitable for investors with lower risk preferences seeking stable returns.
LEARN MORE ABOUT HOW TO CONFIGURE A ROUND-THE-CLOCK PORTFOLIO
Asset Allocation Considerations for Timely Review and Adjustment
In general, it is recommended to review and consider adjusting your portfolio and its ratios at least once a year to ensure it matches your investment objectives, ideal asset allocation and risk tolerance.
How to buy ETFs? Where to buy ETFs?
Account Opening Deposit
Learn how to invest (buy and sell) ETF stocks if you use ETFs to diversify your investments?
Before investing in (buying and selling) ETFs, you first need to open a securities (stocks) account.
Futu Securities Opening Steps
Head over to Futubull and sign up for a new account.(Register now)
Open a securities account on the basis of a Futui account and now open in Futui and send up to more than $1 trillion in rewards.
EXPLORE INDUSTRY OR BOARD OPPORTUNITIES THROUGH ETF! Open Futubull, select “Markets” in the navigation bar below, click “ETF” on this page to help you find more ETF investment opportunities.
How to Make an ETF Setup Through Futu
You can easily view ETF listings and information for US stocks, Hong Kong and other markets via Futu. Easily accessible to a particular market or industry, you can quickly select the relevant asset ETF you want to trade with a wide range of tools.
ETF Heat Chart
The ETF Thermograph feature divides ETFs into asset classes, sectors and regions. Rising and falling colors visually represent the overall performance of various ETFs, and the depth of the color reflects the strength and weakness of the performance. After clicking on the industry section, you can view a list of specific ETFs under that industry.
Topic ETF
The Topic ETF feature breaks down ETFs based on current hot topics or industries, such as Bitcoin ETF, Gold ETF, etc.
Investors should gain insight into ETF's investment strategy and stock composition, and should be able to select the right product portfolio based on their investment objectives and risk assumptions. With Futu's versatile tools, you can explore the market's ETF selections, monitor market dynamics and investment opportunities, and define smarter investment strategies.
