Portfolio Management - Asset Allocation, Diversification, and Rebalancing

http://createwealth8888.blogspot.com/2009/11/portfolio-management-measuring-success.html

http://createwealth8888.blogspot.com/2009/11/beginners-guide-to-asset-allocation.html

Let recall what were discussed in the earlier posts:

The Magic of Diversification.

The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.


Asset Allocation 101


Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.


In his classic book "The Intelligent Investor," Benjamin Graham -- Mr. Buffett's mentor -- advised splitting your money equally between stocks and bonds. Graham added that your stock proportion should never go below 25% (when you think stocks are expensive and bonds are cheap) or above 75% (when stocks seem cheap).

Graham's rule remains a good starting point even today. If time turns out to be your enemy instead of your friend, you will be very glad to have some of your money elsewhere.

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CreateWealth8888:

So my friend,  asset allocation, diversification, and rebalancing can be very personal and you must find the right mix according to the size of your nett worth.

I just cannot follow Classic or Graham's advice into Stocks and Bonds as I don't have a Private Banker to advise me on the timely availability of good yield bonds that on private fire sale. But, I do have a "mini bond" approach (I know what you are thinking, it is definitely not the toxic Lehman Brothers MiniBonds. LOL).

Why Bonds?

Typically, bonds pay interest semiannually, which means they can provide a predictable income stream. Many people invest in bonds for that expected interest income and also to preserve their capital investment

My "MiniBond" Approach:

MiniBond = CPF Ordinary Account + Pillow Stocks+ Dividends From Pillow Stocks

So my "MiniBond" has the similar effect of expected interest income (2.5% interest rate from CPF OA account and average of more than 5% yield from pillow stocks) and capital preservation (pillow stocks are cost-free so there is no capital at risk)


Follow the Golden Rule:

Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash

This is what I have done:

With the personal choice of mix of asset allocation, I will be able to limit losses in the stock market and reduce the fluctuations of stock investment returns without sacrificing too much potential gain and can still expect some regular passive income that will meet the minimum cost of living expenese.