Tags
2015, personal finance, portfolio, portfolio allocation, portfolio policy, portfolio rebalancing
Recently, there’s been quite a number of global scale of financial activities, including but not limited to Greek talks to exit EU, Dollar strengthening, EU and Japan quantitative easing, Oil prices plunge as well as softening of China’s growth. All these news not only introduces volatility which I believe is beneficial to speculators as well as increasing the risk of the next global scale recession.
With the Dollar strengthening, the world is once again looking at this reserve currency to base their financial and monetary policies on it, and I personally take this as a huge risk, just as how the subprime crisis started in US and landing a huge blow to the world in 2008.
With these in my mind, I think it will be good to look into locking in the profit / loss by making necessary adjustments to my portfolio. To start this exercise off, I think there will be a few necessary questions we should ask ourselves, to determine whether such actions shall be taken, and how this to be carried out.
Question 1: What’s your current equities exposure in your portfolio?
Question 2: If equities were to drop 50%, can you take it?
Question 3: What’s your exposure to high yield bond? And other fixed income
During a downturn, equities could have dropped 50% or more, and assuming you have a 50-50 portfolio model, that’s 25% of decrease in your portfolio value. Are you willing to lose that 25% in a short period of time? And most importantly, would that affect your daily living, posing great risk to your overall financial health? Besides equities, companies during market rallies will usually issue high yield debt to get the liquidity needed for expansion activities…etc. And these were the earliest hit if a market downturn is to happen, posing a great credit risk to your portfolio as a whole. Apart from credit risk that companies in expansion mode might fail to repay its debt and defaulted during the downturn, interest rate fluctuations due to the monetary policies by various federal bank could pose risks to your fixed income securities as well.
Here’s my own answer to those questions:
With reference to the chart, a drop of 50% in equities as general will cost me 30% to my overall portfolio data. Personally, I’m fine with such hit, partly due to these are my extra funds that wouldn’t have instant effect to my overall financial health. However, with my belief that a market correction is coming soon, I would prefer to mitigate the risk. To do that, I would look at the allocation of each fund that’s currently in my holding.
Two of the biggest holding in my portfolio, RHB-OSK Emerging Opportunity Unit Trust and Kenanga Growth Fund, which together makes up of 33% are both Malaysian equities based fund. These 2 would be my first choice if I were to decrease my equities holdings.
For the 3rd question, I would need to dive deep into all my bond holdings, which will be followed up in my next post.
Sources of reference:
These 6 tests take the stress out of investing http://on.mktw.net/1xi6huO