For those who have been working for some time, one question that comes up to me often when I speak with these people is the question of asset allocation. How much of my portfolio should I put in REITs?
To tackle the question, let’s first start with how much you should put in stocks, which is an umbrella term that covers REITs.
One school of though advocates putting a percent into bonds based on your age.
If you’re 30 and have S$10,000 to invest, put S$3,000 into bonds. If you’re 40, put 40% so on and so forth. The remainder goes to stocks.
Another school of thought advocates 4 buckets
- Ultra aggressive: 100% stocks, 0% bonds
- Moderately aggressive: 80% stocks, 20% bonds
- Moderate growth: 60% stocks, 40% bonds
- Conservative: Less than 50% in stocks.
Yet another school of thought suggests you allocate based on your life stage.
- Fresh graduate? 100% in stocks
- Mid career with family? 80% in stocks
- 40’s to 50’s? 50% stocks
- Retiring? 30% stocks.
Personally, I go with the “bucket” school of thought mixed with where I am in life. The resulting portfolio is an approximation and moves at the edges as markets rise and fall.
I go with the principle that the allocation to stocks falls as one age.
To round up the first part, let’s see what the various portfolios would have returned you over time.
Bottom line – the more you put in stocks, the higher return you get. With higher risk of losing your money though.
Now to the second part, how much of your stock allocation should go to REITs?
First, let’s understand the nature of REITs. The returns and risk profile is somewhere in between stocks and bonds.
This means that stocks can give you a higher return over time but with higher risk. Among stocks, REITs and bonds, bonds give you the lowest return but lowest risk.
REITs place you somewhere in between. It won’t bag you a 1000% return stock, but it likely won’t cause you sleepless nights when the market falls too.
In this way, REITs can be considered a standalone class, though technically people bucket it under stocks.
For the sake of this thought experiment, let’s work with 3 asset classes, stocks, REITs and bonds for a 35 year old individual.
Based on his life stage, he would have worked for about 10 years, possibly married or going to. He also might have kids.
For a 2 asset class portfolio, an appropriate asset allocation would be 60 to 70% stocks, 30 to 40% bonds.
For a 3 asset class portfolio, I would venture to say that the appropriate allocation would be 40 to 50% stocks, 20 to 30% REITs and 30% bonds.
The stock component would give this person’s portfolio potential for capital gains.
The REIT component would give him a steady income.
And the bond component would provide diversification gains and reduce the portfolio’s overall risk.
So there we have it, a simple and understandable way to allocate your portfolio.
Share with us, how do you allocate your investable funds? What amount goes to stocks, bonds and REITs?
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