08 January 2013

How to Create A Portfolio Consists of Real Estate and Equities

If you realize that, the Fix Deposit (FD) rate is as low as 1% in Singapore and 3.7% in Malaysia. So it is unwise if you keep on parking your excess cash in FD for more than 3 years, unless you keep it for short term purpose, such as education fee for kids, personal travelling expenses etc. So if you like to create a portfolio consists of real estate and equities, below is my humble opinions:

  1. 50% Real Estate, 40% Equities, 10% Cash - This is a balance portfolio, to prevent you from suffering from a sudden drop from Stock Market and enjoy a stable rental income while fighting against the inflation. To me, I prefer to have this portfolio as the you can always strive to a balance portfolio, to avoid you to face cash flow problem. I understand that real estate investment is one of few investment tools that do not need to face the "Margin Call" risk, as long as you get meet the monthly instalment payment rule. To me, you have to have more time monitoring the stocks in your portfolio, as it can be long term or short term investment. But real estate investment is more like a long term investment, so you do not need to pay for the capital gain tax within 5 years. 
  2. 70% Real Estate, 20% Equities, 10% Cash - If you are more comfortable with real estate investment, which means you are a person who prefers stable rental income and do not have much time in stock picking, you could prefer to have larger portion in Real Estate. But please be aware that you might face "liquidity" issue when you try to dispose off real estate under your name, unless you are willing to sell it at slightly lower price compared to current market price. 
  3. 20% Real Estate, 70% Equities, 10% Cash - if you are more comfortable with stock investment, it is wise that you put larger portion of your invested capital in equities. Why do we still put 20% in real estate? It is to allow you to enjoy stable rental income when stock market crashes, so that you will get lesser impact on cash flow problem. 
On top of that, you can see that normally real estate value is normally quite high. In Johor Bahru, a new cluster house can simply cost you for about RM500K - RM600K and above. Of course, you have to be more rational when calculating return on real estate. A rental yield of 8% and above can be a very good investment in real estate, while you need to set at least 15% annual return for your stock investment, to allow you to grow faster in your portfolio.

The beautiful part in real estate investment is that, you can borrow up to 90% bank loan in Malaysia and 80% in Singapore. With little down payment amount, we can leverage up to 10 times in Malaysia and 5 times in Singapore. If we can "Flip" the properties (but we still need to pay the interest if it takes time for us to flip), we can enjoy a decent return even after deducting capital gain taxes. But it is always a risk if you have this mindset always. It could become a "gambler" mindset and you may end up suffer a loss. Always calculate the underlying risk before you go and "hoot" in the investment you prefer.

For equities wise, I still prefer to have at least 50% in equity market in long run, so that I can enjoy higher capital appreciation compared to the rest investment tools. If we can invest in bear market, the return could be more than 100% when market turns to a bull market. Nonetheless, you have to spend more time in studying all the public listed companies you are interested on. You have to be more sensitive in the market movement as the shares price is more volatile compared to real estate market. You can make use of this to earn more.

Oh ya, I always have at least 10% in cash in mind, to allow me for a bargain hunting or for emergency fund purpose. It is a good ratio for me for cash portion, as I do not need to have more than 10% in my portfolio, to allow me to fight against the inflation demon. In long run, it is wise to build your own portfolio to see it grow bigger and bigger, instead of leave it at bank to let others to get richer.


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