Asset Allocation – How Much to Invest in Stocks?

“The asset allocation decision is one of your most important investment decisions.”
– Introduction to Personal Investing, IMAS

I first encountered this statement in 2017, and was intrigued by it. Prior to that, my investment focus had been solely on stock selection. I was in my early 40s and having garnered some experience in investing, I decided that it’s time to relook at my approach.

Thinking back, this coincided with the time when I had been involved in the management role for about seven years. While I don’t believe the role was the direct cause, the experiences of starting new projects during that period likely shaped my thinking.

Why is asset allocation important?

Imaging renovating a house. While furnitures, appliances and decors are important, getting the house layout and renovation style right is crucial. This ensures that the completed project aligns with what you envisioned.

Similarly, asset allocation is fundamental. Factors like risk tolerance, investment strategies, and time horizon are the layout and style. Getting these right will aid in the stocks selection and improve your chance of meeting your investment goal.

Moreover, these factors are dynamic and may change as life circumstances change, making regular reassessments essential.

How much to invest in stocks?

The 100 minus age allocation is a common rule of thumb for asset allocation. It states that that one should hold a percentage of stocks that is equal to 100 minus age. The remaining will be allocated to bonds and cash.

The idea is that as one ages, one should have less risky assets like equities as he would have less time to weather its volatility nature.

While the rule is easy on the brain, I don’t follow it.

Similar to the 4% withdrawal rule, it is good as an initial guide but we should never apply it blindly, as such rules of thumb do not account for individual circumstances, risk tolerance, or specific financial goals.

How did my asset allocation evolve over the decades?

I can’t advise what your allocation should be. But I hope that the sharing of my personal reflection provides you with something to think about. Here’s the stories behind the numbers.

• The equities/net worth allocation is significant lower than equities/current asset allocation due to 35% stock limitation in CPF. While I did invest in unit trusts along the way, it’s not my preferred method. As for investing in S&P index with CPF, this option is only available in recent years.
• The stock allocation increased as I went from 30 years old to 40 years old. This is primarily due to increased in active income and reduced in mortgage expenses. Without a mortgage since 40, I could allocate more to stocks.
• The decision to leave my regular work in 2023 means I needed more cash buffer to tie me over a bear market. Additionally, with a good interest rate for T-bills, I have put a significant portion of my CPF-OA in it.

For those in their twenties, thirties, or early forties, I encourage you to consider taking on more responsibilities or larger roles to increase your active income. This can not only provide more funds for investing but also offer valuable opportunities for personal and professional growth.

I have personally benefitted from these experiences. In another word, I won’t be who I am today if not for what I went through.

Going forward, there might be some minor tweaks to the allocation.

While my equities/current asset allocation is likely to remain fairly stable, I will need to consider what I want to do with my CPF-OA as T-bills interest rate is on the decline.

Based on current thinking and planning, I am comfortable with holding 60-70% of my asset in equities, even when I am in my 70s. However, my perspective may change as I get closer to that age.

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