| Chart 1: Portfolio Allocation achieved with $200 contribution per month |
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The implementation of the RSP Special List initiative has created exciting new opportunities for our investors. For many, the initial investment amount (usually $1,000) was a huge stumbling block. With 170 funds now free from this constraint, how can investors who are starting out in their investment journey utilise this new initiative?
The importance of owning the world (investing globally)!
At Fundsupermart.com, helping investors to invest globally (and profitably!) is our motto. Our belief is that while most single-country economies will suffer some sort of setback over an investor’s investment journey, the global economy on the whole grows over time. Thus, investors who own globally-diversified portfolios stand to benefit from this phenomenon.
Stocks AND Bonds
Just as we expect different economies to suffer setbacks at some point of time, we also expect stock markets to encounter rough periods. Stocks and bonds are two key financial assets which can provide positive returns to investors over time, but respond differently to varying market conditions. The low correlation between the two assets tends to lower volatility in a portfolio, leading to less distress for investors in turbulent markets. Just as you will want a share in many pies when investing in stock markets, you will probably want to own a mix of financial assets (bonds and stocks).
Investing only $100 per month to create a globally diversified portfolio?
Now that investors only require an investment of the minimum RSP amount on a monthly basis, a globally diversified portfolio can be initiated, with the use of balanced funds. As a balanced fund contains a diversified mix of both stocks and bonds, a single fund could satisfy the requirement of being “globally diversified”. Table 1 shows the various global balanced funds on the RSP Special List and their respective benchmarks. An RSP utilising just a single balanced fund could be sufficient to create a diversified portfolio.
More stocks, less bonds? Use an Asian balanced fund and a global equity fund for $200 a month
As shown in Table 1, global balanced funds have a targeted equity exposure of 40% to 65%, although the actual allocation may change depending on the fund manager’s view on the relative attractiveness of each asset class. Young investors who are just embarking on their investment journey may find this allocation too defensive, especially if they are looking to invest on a monthly basis for the next 30 years!
If you are such an investor, you may wish to consider buying into two funds: an Asian balanced fund and a global equity fund. This would amount to a $200 minimum monthly investment via the RSP - $100 into each fund. Asian balanced funds in the RSP Special List are shown in Table 2. As an example, assume a monthly purchase of First State Bridge and Aberdeen Global Opportunities in equal amounts ($100 each). For just $200 per month, you can build a portfolio consisting of 25% in Asia ex-Japan bonds, 50% in global equities, and 25% in Asia ex-Japan equities (see Chart 1).
| Table 2: Asia ex-Japan Balanced Funds |
AIGIF Acorns of Asia Balanced Fund |
60% MSCI All Country Far East Free Ex Japan ( DTR Net) in SGD / 40% JP Morgan Sing Govt Bond Index |
First State Bridge |
50% MSCI AC Asia Pacific ex-Japan Index (Unhedged) & 50% JP Morgan Asia Credit Investment Grade Index (Hedged to SGD) |
PRU Asian Balanced Fund |
50% MSCI AC Asia ex-Japan Index; 30% ML US Corp A-AAA Rated; 20% ML US Corp BBB-A Rated |
| Source: iFAST Compilations, fund factsheets |
A positive response to every market situation
Now assuming you have already embarked on your epic journey to build a globally diversified portfolio (which could consist of just one global balanced fund, or one global equity fund and an Asia ex-Japan balanced fund), how should you respond to fluctuations in the market? We have some suggested responses to several potential situations:
- ”Asset prices are collapsing!” – Fantastic, your next monthly contribution will buy you a larger number of units
- “The stock market is booming!” – Fantastic as well, you already own stocks in your portfolio and you’re becoming richer as they rise in value
- “The Fed just cut rates so bond prices are spiking!” – You’re benefiting; you own bonds in the portfolio too
- “The US just imposed trade restrictions on Chinese exporters! Their stocks are going to get hit!” – Not to worry, your portfolio probably contains the US manufacturers who are going to benefit
- “China is the growth story for the next 100 years! You’ve got to own their stocks!” – Yes, you own some Chinese stocks as well, just that they don’t make up your entire portfolio
- “(Insert the name of a small, obscure company here) is the next Wal-Mart!” – Indeed, if the company is too small, you may not own it now. But as soon as it becomes important enough, the fund manager will sit up and take notice, and you’ll own some of it in your portfolio
Positive responses may be derived from various market situations, which could leave you, the passive $100 or $200-a-month investor, rather bored but wearing a smile on your face all the time.
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