By Mindy Tan
IT is one of the most important decisions an investor can make, and yet, one of the most difficult strategies to pin down.
Asset allocation, essentially a strategy taken on by investors in an attempt to balance risk and reward by portioning one's portfolio's assets, is intimately tied to one's goals, risk tolerance and investment horizon.
In this issue, we provide you with a variety of insights from experts in academia.
Dr Douglas Rolph, senior banking and finance lecturer, Nanyang Business School:
Younger investors should allocate 100 per cent of funds for retirement in a well-diversified international equity portfolio. Even with the recent turmoil in financial markets, over long investment horizons the risk-adjusted returns of equities are higher than other asset classes. For example, investors under the age of 35 have around 30 years till retirement; they stand to greatly benefit from the higher returns of long-term equity investment strategies.
Some younger investors are naturally more apprehensive towards potential investment losses, and may be inclined to invest less of their retirement funds in equities. While investing in stocks with the intention of selling in a year may expose investors to substantial losses, the higher growth rates of equity dominate risk over long investment horizons.
But as they get older, say around age 35, they should gradually decrease the amount of investment funds allocated to equity.
Instead, these funds could be invested in lower-risk assets like short-maturity bonds.