Investment Portfolio: Striking the Right Balance
Investing can be one of the best ways to achieve your financial goals. However, it can also be daunting to a lot of people, especially those who are merely getting started. With numerous options around, identifying the type of investments that are right for your portfolio can be rather intimidating.
One reliable method is to ensure you do not have all your eggs in one basket. A good mix of healthy investments is typically better than having just one type of investment.
Asset allocation and diversification will enable you to hold an extensive variety of investments and help strike an optimum balance between return and risk in your portfolio.
Because different investments tend to gain or lose value at varying rates and times, asset allocation and diversification will minimise any impact that economic or market conditions have on your portfolio. This means that when one investment is undergoing a rough patch, the other will be able to compensate for it.
A study conducted by Brinson, Hood, and Beebower found that over 90% of differences in returns across portfolios are attributed to strategic asset allocation. Through diversification, non-systemic risks are also virtually eliminated from a portfolio using the diversification method – making it one of the ultimate keys to prudent risk management when coupled with asset allocation.
The difference between asset allocation and diversification
While asset allocation and diversification seem rather similar to many, they are actually very distinct.
Asset allocation: Refers to the way your portfolio is divided among asset classes including bonds, cash, stock, and other investment types which carry varied risks. Your asset allocation into these asset classes will heavily depend on the amount of risk you are willing to take as well as your investment goals.
Diversification: Takes asset allocation a step further by dividing your portfolio with various investments within a specific asset class. For instance, if you are investing in stocks, you would have different types of stocks within your portfolios such as small cap, large cap, and international. This can be diversified even further based on sectors such as healthcare, education, technology, and more.
Constraints that influence the sweet spot
Now that we understand the difference between asset allocation and diversification, how do we try and ensure we hit that balance sweet spot?
The asset allocation and diversification that will yield the best outcome for you will heavily depend on the constraints that you set.
Time Horizon: Refers to the anticipated duration in which you hope to achieve your investment goal. Investors who are nearing retirement or who are not comfortable taking risks tend to invest a significant portion of their portfolio in low-risk assets such as bonds or cash while risk-taking investors favour high-risk investment options as they tend to result in high rewards. A longer time horizon will allow investors to ride out any short-term losses due to market conditions.
Unique needs and preferences: Refers to constraints that are typically internally generated and are aligned with the beliefs, values, and religion of an investor. For example, you may specify that no investments in your portfolio are to be connected or related to alcohol, tobacco, or products that are environmentally harmful while other investors may choose to invest in US stocks or shariah-compliant investments only.
Liquidity: In other words, the ease of converting investments to cash. These constraints are related to expected expenses that are required at a specific time and are generally in excess of available income. Stocks and bonds are more liquid in comparison to private equity or real estate investments.
Returns: Returns should be realistic and parallel to the market. There are 2 kinds of returns- relative and absolute. Relative returns is the returns of your portfolio achieved over a given benchmark index such as S&P 500 or KLCI while absolute returns is the asset or fund of a portfolio returned over a specific time period.
Risk Tolerance: Your ability or willingness to take risks in exchange for greater potential returns. Aggressive investors are more likely to be able to tolerate higher risk in the market and accept greater potential for loss in order to seek better results while conservative investors favour investments that will preserve their original investment.
Invest in smarter portfolios with Wahed
Wahed provides a diversified portfolio range that includes regular and thematic portfolios suited for all types of risk profiles.
For risk takers, Wahed offers:
- Thematic Portfolios - Global stocks and emerging market funds
- Regular Portfolios - Moderately aggressive, aggressive and very aggressive
While for risk-averse clients, Wahed offers:
- Thematic portfolios - Gold, local real estate investment trusts (REITs) and money market funds (REITs and money market funds are only available in Malaysia and UK)
- Regular portfolios - Moderate, moderately conservative and very conservative
What you will invest in with Wahed
Global Stocks: Mainly from developed markets of the world. This is a diversified investment across sectors and geographies and follows a large-value investment style.
Emerging Markets Stocks: Capable of providing great potential for growth. This asset class comes with higher risks than developed market stocks but can also provide higher returns due to increased economic production and market capitalization of developing markets.
Sukuk: Provides ethical instruments for investments that do not involve riba' (interest) and excessive gharar (uncertainty). Sukuk holders have ownership of the underlying assets and are entitled to proceeds from Sukuk assets, unlike bondholders who are only eligible to receive interest yields from bond issuers. Sukuk must be asset-based and interest-free.
Gold: Commodities as an asset class have a low correlation with the stock and bond markets. Currently, only gold is selected to represent the commodity asset class. This is because gold provides good potential for long-term capital appreciation and acts as an inflation protector.
The Wahed app is specifically designed to be friendly for new investors who want to start investing their money the “halal way”. Malaysian investors can kickstart their investments with as low as RM100 in capital and an annual fee of only (0.39%-0.79%). American investors can invest a minimum of $100 in capital and an annual fee of (0.49%-0.79%) while UK investors, £50 with an annual fee of (0.49%).
Users will be required to answer questions to understand their investment objectives, undergo a face recognition process, and describe their profile which would allow the Robo Advisor to recommend suitable investments that best fit the users' risk profiles in just a few minutes.
Once the user has started their investments, the user will be able to make a withdrawal at any point in time as there is no lock-in period.
Download the Wahed app on the App Store or Google Play now to start investing. Should you have any questions, please do not hesitate to contact us at firstname.lastname@example.org.
This material has been distributed for informational and educational purposes only and the opinions expressed represent the views of the author and not necessarily those of Wahed Invest LLC or any of its affiliates, directors or personnel (“Wahed”). Any assessment of the market environment as of the date of publication is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice. Wahed assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. Any strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security.
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