One of the forums that I join is Shareinvestor.com where I meet many interesting individuals who have gone through vastly different experiences in life in journeying towards financial freedom.

Today I am pleased to feature one such post, obtained with his kind permission, on his take on what makes up a balanced portfolio. This experienced investor’s take gives you a glimpse of what a real life investor sees when we talk about investment portfolios.

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Hi Mera San

A balanced portfolio can be constructed according to each person’s risk appetite and lifestyle requirement: typically it employs some kind of assets allocation method (or for myself, I prefer “asset dedication” concept as I do not change the composition percentage any time) such as shares/unit trust; rental properties; and opportunity cash holdings. There are other matrix to protect your portfolio and they can be read about in those financial planning books in the National Library where I learnt it myself.

At times, a very simple conceptual realignment is required: such as by reducing your Singapore dollar based income as compared to your total annual income. You don’t need to know about how to calculate the complicated beta coefficient, or how to achieve the optimum diversification of risks and I do not mean a “balanced” portfolio in that strict finance text book sense. However, it would certainly help if you understand the political economics and the business culture of the regions that you are investing in.

For example, like Dennis San mentioned before that he would be happy to receive S$200K a year of retirement income from his portfolio, and assuming that he would be able to get an income yield of 10% pa from his portfolio. Basically it would help if you can afford a portfolio size of S$2 million to jump start like that and to construct a portfolio of which a combination of assets that could generate income yield as well as capital growth. And you definitely need more capital if you are unable to achieve an income yield of 10% pa.

The portfolio arrives at the “balanced” status after a few years’ of testing when the income yield not only stablizes at 10% pa (using the same above example) but also starts to give you higher returns when the companies paying higher dividends and bonuses; without much closely following up of course. If it does not, then you would have to twit it to re-balance your portfolio. Thereafter, like the text book “Rich Dad, Poor Dad” tries to describe about the passive incomes which would provide you with financial independence so that you can retire from working for others like a slave. That’s the financial freedom that all of us have been dreaming for some time.

As I was first retrenched very early in my professional career, it taught me an important lesson that when I grew older, I might not be so lucky to be gainfully employed again. So I started to construct my “retirement” portfolio more than 10 years ago before my final retrenchment in 2003. As it turned out, 10 years of hard work and savings were sufficient to set up a “balanced” portfolio for retirement purpose. It is not as rosy as most financial planners would tell you that you can set up a “balanced” portfolio at any time because market forces are very dynamic. Of course, you can start constructing the portfolio any time bearing in mind that you would be very lucky to set up the portfolio during the trough of the cycle, and very unlucky to set up the portfolio at the peak of the cycle. The portfolio under construction can only reach its “balanced” status after a few years of monitoring.

And to set the record straight, in 1992, we first started out to buy our first HDB apartment from the open market because of our combined income level, we had mostly CPF cash balance down as deposit. And I started my portfolio with another $100K. So that required me to follow strict discipline when investing in shares, with no other property investment in Singapore. I opened a separate bank account so that I don’t conveniently draw the winnings to spend on non-income producing “assets”. Certainly the 1994 stock market boom in Singapore helped my portfolio to increase in valuation, and the 1995 China missiles saw our HDB apartment doubled in valuation. And the rest were just histories. In 1996, when I was in US, I picked up a book on Warren Buffet, just to satisfy myself that what I had done for that past few years, were the similar strategies employed by Warren and his team.

Little did I know at that time, because of the fear of URA’s land acquisition law, had actually helped me to escape the 1997 Asia Financial crisis when Singapore properties crashed below its high valuation. I had seen friends who were having a few condos suffering from negative equity and had to let go their prized assets at one time. Because my father experienced the “lost” of his old shop house, and one of my cousins later suffered the same fate of seeing his old shop house in Nanking Street was acquired by URA with cheap compensation, and later on sold to big developer who “beautified” it and turned it into a 4 unit rental shop and office, it gave me an illusion that it was not very safe to invest in rental properties including condominiums in Singapore. Another reason was obviously the highly priced condomimiums seemed so far reach in Singapore.

I went overseas to look for that magical 6% pa yield in property investments. Until in 2003, I noted that property prices in Sydney became more expensive than that in Singapore’s district 9 and 10. I think it was partly due to our Capitaland’s involvement in Australian properties that helped to drive prices up after the 2000 Olympics game. So we had no investment property in Singapore before 2003. And my benchmark pricing was very simple back in 1996, as long as the Australian house price was below the Merc C200 car price in Singapore, I would consider buying.

A second simple conceptual realignment employed here is not to invest in non-income producing assets that would make a hugh difference after 10 years. Because after 10 years, the Merc C200 dropped to scrap car value and the COE dropped to zero value, but the Australian house valuation had in fact doubled on top of rentals received. The total effective difference can be up to S$400K per car/house if you do not use leverage in loan. (S$200K lost in Merc C200 plus S$200K gain in Australian house in 10 years.)

So do you still want to buy a Merc C200 in Singapore? I think many people fail to see that erosion of value of money in Singapore after they become too successful in pursueing the 5Cs as a lifestyle chaser. That chase had in effect diminished many “commoners” dream to become a millionaire in 10 years. Of course, big bosses in this forum like kbl San might argue with me that the Singapore LaoPans all use big big Mercs. My reply is that that’s the unfortunate reason why we don’t see another Warren Buffet in the making in Singapore.

So the third simple conceptual realignment is that one must adopt a wealth builder lifestyle and not be a lifestyle chaser. Not only that we want good returns, but we also want good capital gains. Can anyone do it? I think so, since I started off with a modest amount of capital, and kept it growing in a 10 year period. Hope the road I travelled helps you to navigate into the right path you are travelling in the future. It is definitely more rewarding when you build up your own “balanced” portfolio that would provide you the financial independence for a relaxing retirement. The search for good yielding assets is a continuous process because we are faced with a dynamic market conditions. Be another very focus karangoonie!! (I drive a focus with a low low COE price.)

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In summary, there are three areas we can learn from Mr. Karangoonie san.

1. Diversify
2. Invest in income producing assets
3. Be a wealth-builder and not lifestyle-chaser

After reading about Mr. Karangoonie san, what will you do with your bonus?
Be well and prosper.