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WEEKEND TODAY • OCTOBER 9-10 • 2004
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QI read in your article last week that
a portfolio’s performance largely
depends on asset allocation. What
is the best way to decide on my portfolio’s
allocation between equities and bonds?
AYour asset allocation decision depends
largely on factors such as your investmentobjectives, risk profile and time horizon. For example, the longer the time horizon you have, or the higher your risk tolerance, the higher the proportion of your portfolio that can be allocatedinto equities.
But your decision on how much to allocate between equities and bonds also depends on the outlook for the equity and bond markets.
For the average investor, choosing the right mix of equities and bonds can be a difficult task. Assuch, these decisions are sometimes best left to professional fund managers.
Investing in a balanced fund is one way of leaving asset allocation decisions to professionalfund managers.
In managing a balanced fund, a fund manager decides on the proportion of the fund’s assets hewill invest in equities and bonds. For example, if heis positive on equity markets, he may invest a larger They are not just a safe haven for conservative investors As an example, consider the OCBC MAP series, which offers four portfolios — conservative, THERE’S a strange tendency for investors anytime. The same is not true when you rate hikes.
balanced, growth or aggressive.
to avoid bonds like the plague whenever invest directly into bonds as some bonds They draw on the expertise of OCBC Asset equity markets make a comeback as are not frequently traded and investors typically issued with maturities of Management to make asset allocation decisions may end up holding the bond till maturity. 10 years or less, they are less sensitive to and invest through a number of carefully-selected Investors think that with rising interest Despite rising interest rates, there are volatile movements in interest rates.
rates and higher potential yields from still pockets of opportunities to be found in Using OCBC Bank’s financial planning tool, stocks, they are better off putting their the bond market.
falling default rates for these higher-risk WealthMap™ , our Personal Financial Consultants money into asset classes other than bonds.
This is because bonds can be classified companies which issue such bonds, can recommend you a portfolio based on factors “People don’t buy bonds when the into many categories, from the conserva- which benefit its investors.
such as your investment objectives and risk profile.
markets are improving. They think bonds tive government bonds, global bonds, And should your needs change over time, you are boring and don’t give very good Asian bonds, high-yield bonds to the bonds.
have the flexibility of switching between the returns,” said Mr Wyson Lim, more volatile emerging market bonds.
Firstly, they are less volatile than Asian While government bonds have a equities, yet offer good returns over the negligible chance of default and therefore medium term given the region’s improv- Do you have a question on your financial situation? But such sweeping notions are give lower yields, emerging market bonds ing economic and credit fundamentals. Send it to us at Wealth_Mgmt@ocbc.com.sg.
misplaced – if not downright wrong.
In the middle lie high-yield bonds — since the restructuring in the wake of the PROMOTIONS
money to an institution in return for a commonly referred to as junk bonds — 1997/98 financial crisis, as well as theregular stream of income called coupon which are typically corporate bonds that appreciation potential of Asian currencies.
payments. Upon the bond’s maturity, you are rated below investment grade, and will recover the principal value of the bond. therefore riskier. For this reason, they are numbers. According to an article by This steady cashflow is one of the most potentially more rewarding as an fundsupermart.com, Singapore Govern- attractive features of bonds, which are investment, compared to traditional ment Securities (SGS) are giving higherusually bought through unit trusts, known government bonds, but not as volatile as returns than one-year fixed deposits. Itas fixed income or bond funds.
This stability factor is important for your Being a speculative-grade bond, high- interbank rates rise, the yields for a 1-year investments, especially in volatile times yield bonds are typically issued by start- SGS bond have also risen, while such as these, as it lowers the overall risk ups, companies that have fallen from 12-month fixed deposit rates at banksof your portfolio.
grace, or firms in high-risk industries, or have stayed stagnant. Bonds should rightly hold their place those undergoing restructuring.
as a staple in your portfolio as they also One important factor: High-yield $100,000 SGS bond, you’ll get a return bonds are less sensitive to rising interest of 1.13 per cent — or $1,130 — after “The bond market, especially the cor- rates, compared to government bonds. • Want a free hamper worth $150, filled with porate bond market, is a very institutional Typically, when interest rates move up, cent) that a current 12-month fixed exquisite bird’s nest, Korean Ginseng, abalone market and often the only way that retail bond prices move down, and vice versa. deposit will give you. slices and other Oriental health goodies? Invest in investors can participate in the such mar- selected unit trusts at any OCBC Bank branch and kets is through a bond fund,” said Mr Lim. vulnerable to interest rate movements and $420 and an example why you should walk away with the instant reward today. Hurry, Also, by investing in a bond fund, you find favour among bond fund managers select the right investment to make your while stocks last! Terms and conditions apply. enjoy liquidity as you can buy and sell seeking to protect their investments from money work harder for you.
• Rich pickings with an insurance plan? Simplyinvest in MaxLink, an investment-linked insurance The answers to last week’s quiz are: True, False, True plan designed to protect your family with room The lucky winner is Florence Chia (I/C: S0036397I) for capital growth, and choose your free gift Here are the questions for this week’s quiz: 1. By investing in a bond fund, you enjoy liquidity as you can buy and sell anytime as compared to investing directly in bonds. (True/False) 2. Government bonds have a negligible chance of default but give lower “TODAY Quiz” in the subject line. A lucky 3. High-yield bonds are less sensitive to rising interest rates as compared to

Source: http://www.ocbc.com.sg/assets/PDF/Investment/Oct_2004_Bonds_have_a_rightful_place_in_your_portfolio.pdf