28 July 2013

How to Construct A Suitable Wealth Porfolio

In modern portfolio theory, it is good to have a diversified portfolio with lower correlation risk. For example, if you have 3 asset classes, you can combine them with your targeted return rate and lower volatility risk. 

As to me, as long as I do not need the money for urgent needs (e.g. living expenses or vacation needs etc) then I can put the excess cash aside to asset classes other than cash & equivalents. So now the next step is how to construct a suitable wealth portfolio for long term investment needs. 

If you are near to your retirement stage, and the purpose of constructing the portfolio is for retirement needs, then you should allocate more cash in high dividend yield counters / bond. I understand that the stable cash flow comes from bond investment. You can put your invested capital there and enjoy regular coupon payment before receive your invested capital at the end of the bond investment. The benefits from bond investment is that you can enjoy higher than Fixed Deposit interest and it is a good investment tool if you wish to park there for more than 1 year. To me, Fixed Deposit is more on for urgent usage purpose. So you can park your excess cash in bond before got good opportunities in equity market. 

The next stable cash flows come from Preference Shares. Priority of Preference Shareholders to receive the cash flow is higher than normal share holders. So it may suitable for investors who like to have higher dividend yield but enjoy lower volatility risk. 

Another good investment tool for receive rather stable cash flow is REITs. REITs cash flow come from Gross Rental Income deducted by administration fees & interest payment. As long as the occupancy rate stays high and the interest rate stay low, the possibility of getting increased cash flow is much certain. 

Last but not least, the investors can receive the cash flow from dividend payment by being normal share holders. Some companies do have dividend payout policy by distributing certain percentage of net income to shareholders. However, it is management's decision to determine the dividend to share holders based on current economy condition. Some companies may conserve more cash during expansion period and distribute it back to shareholders when it reaches mature stage. 

For capital appreciation purpose, the sequence is shown as below:

1. Normal Shares >> 2. REITs >> 3. Preference Shares >> 4. Bond 

To construct a good portfolio, you may first identify your own risk & return profile and the investment time horizon. The longer investment time horizon, the more capability for you to put more in normal shares. And if you have greater amount for investment, you can put more percentage in normal shares. 

Anyway, I strongly encourage you to do more homework before creating your own portfolio. So you can understand the underlying risk while waiting for your targeted return. 

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