This is the 3rd part of the series of my yearly portfolio rebalancing exercise, where in previous posts, I’ve laid down the plans to do it, as well as some indicators and allocation targets of my portfolio. In this part, I will discuss about Investment Thesis, which I personally believe is important as it helps investors to focus on their investing goals. As this is a rather general thesis for my portfolios, instead of the individual funds, it looks rather like a goal statement.
Core Portfolio
The main objective of the core portfolio is to preserve my purchasing power in the long run. To achieve this, the return of the core portfolio has to at least beating the inflation rate thus preserving the purchasing power.
Putting down the goal in figures, the target of annual return for this portfolio would be 2 times of the official inflation rate. The reason of setting this goal is because the official inflation rate is calculated based on price indexes changes of only a selected list of consumer goods, and I personally think a more appropriate inflation rate to beat is that value times 2.
On top of that, the minimum holding period of the funds in the core portfolio is 3 years. There will be no other factors that will cause me to sell the funds except the following:
i. Change of fund management
ii. Change of fund strategies
iii. Expense ratio has been unjustifiably higher than the limit I set
The allocation strategy for this portfolio is the split of 75% and 25% between equities and fixed income. The changes of the allocation will depend on the market sentiment of the moment.
Diversification is another important concept that this portfolio will employ, where the domestic market will only be covering 60% of the total value and 40% will be used to cover for other geographical market.
Action that is related to “timing the market” will not be used in this portfolio, except for income-based investment where the best time is to entry is usually after the income has been distributed.
In addition, dollar cost averaging (DCA) is the strategy employed in the portfolio, as timing the market is not a foolproof strategy and no one has ever been consistently successful in timing the market. Instead of wasting extra effort to time it, I will stick to DCA to increase my holding in the funds.
Finally, there will be at least a yearly rebalancing exercise to be done on the portfolio. However, I will continue to monitor it at least every 6 months.
Supplementary Portfolio
The objective of this supplementary portfolio is to grow my capital, thus this is basically a growth portfolio. With this objective, this supplementary portfolio will enable me to try out strategies that will expose me to higher risks and thus possibly higher returns, and these actions include but not limited to timing the market, momentum investing, alternatives / derivatives fund and others.
Due to the higher risk of this portfolio, the total value of invested capital will never exceed the 10% of the total invested capital in the core portfolio stated above. This is one way for me to minimize my total risk of not losing too much of my capital.
Besides, there will be no minimum holding period of the funds in this portfolio. I’m allowed to get in and out the market anytime, provided the excessive trading would not erode my capital.