In 2023, we hired 2 different financial advisors to help assess and advise us on our investment portfolio as we started to have more and more spare cash that was sitting around uninvested. It was difficult to assimilate the advice from the internet because, although we were young enough to take risks and go all in into stocks (a common advice), we were also planning for the possibility of exiting the business. We also already have a large proportion of our net worth in real estate, which is rarely discussed online (google for “asset allocation” and all you can read about is stocks and bonds).
I had expected to get clearer answers about what we could do with our money, but disappointingly, one didn’t have much of an idea about asset allocations while the other’s proposed asset allocation mainly consisted of a large proportion of their own unit trust products. (They also added additional 1% platform/management fees on top of these unit trust fees, which was honestly infuriating). NONE of them spoke about developing an investment plan or investor policy statement! (In my opinion, this should be NUMBER ONE in the agenda after compiling and determining assets and net worth).
Why is an investment plan a MUST?
An IPS isn’t only for the well-heeled who love paperwork. It’s a must for all investors. That’s because creating an investment policy statement forces you to put your investment strategy in writing and commit to a disciplined investment plan. It’s both a blueprint and a report card.
Morningstar Investing Classroom: Creating your Investment Policy Statement
– It keeps you on track towards meeting your investment and retirement goals.
– It helps you decide what to do with your money; where, when and how much.
– It prevents you from being too heavy in one asset (unless you actively choose to be!)
– It helps you budget your spending and giving.
Without a clear investment plan and target, we deployed far too little and far too slowly. It took me another whole year to get more clarity. Here’s what we came up with in the end: See our basic Investment Plan v1.0!
How did we come up with our allocation percentages?
First we needed to know our target return rate
An optimum investment return rate ensures that there will still be net worth growth after taking inflation and expenses into account.
Investment returns % – Inflation % – Expenses %
= Net worth growth %
A critical factor (and one within our control) is expenses. If expenses are merely 1% of our net worth, we would need to make only 1% + 4% (inflation) = 5% in returns to keep the account “untouched”. Any return higher than that grows our net worth. Double expenses to 2% though, and we now need 6%! Thankfully we live in Malaysia, so we can live very comfortably with lower expenses. I suspect we would actually enjoy a higher quality of life here than having twice the budget overseas!
My projections showed that a minimum 2.5% return should give us enough to live till 100 (dying with zero), but a 7% annual return would be nice to have in order to not draw down the assets over time 1.
So to reach our asset allocation numbers, I simply tweaked our investable asset percentages such that average weighted returns worked out to around 7%.
How much are we willing to lose?
Achieving the goldilocks balance between sufficient returns and excessive risk/volatility
But why not max out on higher-yielding assets like equity or crypto, and get higher potential returns? Well, I don’t think I want to see our entire net worth drop by half or even 30% in a bear market! If we already have enough to be financially free, we don’t really need to make more returns and take more risk in the process. It’s important to find a loss number or loss percent that you can tolerate and won’t lose sleep over.
Anyway, here’s my thought process for each of the asset classes that make up our portfolio:
Real Estate
I’ve always loved real estate! I never tire of going through property ads and viewing units for sale. Our profits from rental works out to a measly 1%, but the value of our properties have gone up such that compounded annual growth rates (CAGR) on our invested sums range from 5.5% to 28% p.a. so far! Prices may plateau after a few years though, so I’ll assume around 10% CAGR on average.
There are many reasons to love property investing. Admittedly it’s more work than buying and holding ETFs, but it’s a good hedge against inflation, prices are less volatile than the stock market and it’s possible to leverage with the cheapest loans around. Another plus point: it is an asset class that has low correlation to equities.
However, our financial advisors cautioned us against collecting too many properties as the negative cashflow and high leverage may cause us more stress once we stop earning an income or if units are untenanted during poor economic cycles. Additionally, properties are illiquid and may take a long time to sell. Finally, real estate is an active investment. Or at least it’s passive until you go away on holiday… then the roof starts to leak! So I’m trying to cap our net worth in investment real estate at 30%. 2
There are other ways of investing in property apart from directly purchasing them, e.g. via REITs and syndications, but it didn’t feel like the right time for these in the high-interest environment of recent years.
High-Yield but Liquid: Equity
To hit the 7% average returns, we’re going to have to depend on other potentially high-yield investments such as equities (ideally ETFs). We have 70% left in the portfolio to assign but I don’t really want to go all-in like some of the online advice. There’s still a risk that the markets end up depressed for a decade or more, as has happened before in the past. This is money that we potentially can’t make again!
However, a 10-15% overall drop isn’t too painful for us. Hence I set a target of ~30% for stocks. 30% is also what a 70-year-old retiree might hold going by the commonly used ratio of stocks: 100 minus your age, bonds: your age. So I feel we’re kinda on the right track. I estimate 8% returns on average for stocks.
What to do with the rest of the cash?
Cash is mostly distributed across our flexi loan accounts, high-yield savings accounts, fixed deposits and extremely liquid short-term US treasury ETFs (SGOV), but we also have some foreign currency and business earnings that sit in accounts that do not pay out any interest at all. I’m more comfortable with a much longer emergency fund of 2 years mortgage repayments + expenses as I don’t want to be forced to sell properties or stocks at a low price in a bear market.
But cash is the lowest yielding asset (~3.2% overall) and drags down performance. You’ll be surprised how easily low-interest current accounts can really hit your overall returns!
As our net worth grows, we will probably be comfortable scaling down this percentage as our mortgage repayments and expenses hopefully won’t grow as quickly.
We are also starting to look into fixed income such as bonds and bond ETFs since interest rates are starting to fall across the world and we want to lock in the higher rates of 4-6%. The cash flow would also be nice to have in case our business profits decrease. For the short-term, there’s also the possibility to make some returns as interest rates fall.
Pension fund (EPF)
As business owners, we take quite a low salary and only withdraw post-tax profits as dividends. Hence our EPF contributions are really low.
That said, I’ve only just learnt that we’ve been missing out on tax relief via employer EPF contributions, so we might start to contribute as soon as possible. Since EPF money will be locked up for another decade, I consider this similar to our fixed income portion, that can contribute around 5% returns plus even more returns due to tax savings!
Alternative Investments
We have a tiny bit of cryptocurrency from when we first bought some for fun back in 2018, plus some top ups made until 2021. Pity it was such small amounts!!! We haven’t decided whether to add more positions.
Precious metals is something I’ve been looking into but haven’t started buying.
We also have a small collection of artwork by local artists (hung at home to enjoy daily!). I don’t expect these pieces to appreciate by leaps and bounds but it would be a nice surprise if they do!
I’ve set aside 2% for now.
See the basic first iteration here: Investment Plan v1.0 and follow us to see whether we have been disciplined enough to reach these targets!
- Assuming 4% inflation per year ↩︎
- I use total equity (market value minus outstanding loans) but some have argued that calculating real estate asset allocation should be done on market value as it is probably more realistic of the risk we are taking. ↩︎
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