Personal Finance Planning Process (Part 3/3)

In Part 1 of Personal Finance Planning Process, we’ve discussed about Mr Rich, a hypothetical character that I have made up to help us understand our personal finances better – because some of us are just better with examples.

We have also discussed about some basic healthcare insurance needs that each of us to PROTECT our human capital, our sole “asset” that is able to help us generate income.

In Part 2, we’ve discussed about some of the wants and needs that Mr Rich has. And let’s be honest, most of his wants and needs are also our wants and needs! So we are not too different from him.

And we’ve also talked briefly about risk profile – the willingness and ability to take risks.

Finally, we are going to dive deeper *oh I love this phrase* into the last part of this Personal finance Planning Process: INVESTMENT STRATEGY.

Investment Strategy

Quick recap for those who have not read Part 2: Previously Mr Rich has listed down all his financial wants and needs such as a HDB flat, a second-hand car, his wedding, retirement expenses as well as his funeral expenses.

We have calculated that in order to achieve these goals given his current earning power and expenses, he would have to achieve a 3.76% return of his investments annually from today till when he turns 60 years old.

Well there are a couple of ways that he is able to achieve that but I am going to share with you something called the Strategic Asset Allocation.

Strategic Asset Allocation

Strategic Asset Allocation is a portfolio strategy that involves setting target allocations for various asset classes, then yearly rebalancing the portfolio to maintain these original allocations. Allocations can deviate due to differing returns from various assets. (Source: Investopedia)

Simply put it means, you buy different types of assets and allocate them a specific % for each asset in your overall portfolio accordingly based on your risk profile. The main point of Strategic Asset Allocation is to minimise volatility and maximise returns.

Generally, when bonds perform well, equities will not. By allocating both asset classes into your portfolio, the gains of one asset class will be offset by the other asset class, hence reducing the risk and provide a smoother return of investment.

There are 3 main types of asset classes that people should consider when forming a portfolio: Bonds, Equities and Cash Equivalents.

However, for more seasoned investors, they tend to include other financial products such as derivatives, forex, real estate, commodities, into their portfolio.



Bonds are debt instruments in which an investor loans money to an entity (e.g. a company or the government) which borrows the funds for a defined period of time at a variable or fixed interest rate. (Source: Investopedia)

For example, the 10-year Singapore government bond is a type of bond that the government use to raise money to finance public projects.

In Singapore, you can consider buying a “ready-made” diversified portfolio of bonds: ABF Singapore Bond Index Fund, to include bonds in your portfolio.


Equities are stocks or any other securities representing an ownership interest. This may be in a private company (not publicly traded). (Source: Investopedia). It is derived by taking Total Assets minus Total Liabilities.   

Whenever you buy a stock like DBS or Singtel, you are actually owning their equity – you OWN DBS or Singtel just like how you own your camera when you buy it from the Great Singapore Sale last week. Equities are generally riskier than bonds.

In Singapore, you can consider buying a “ready-made” diversified portfolio of 30 blue-chip companies: STI Exchange Traded Fund, to add equities into your portfolio

Cash Equivalents

Cash Equivalents are investments securities that are for short-term investing and they have high credit quality and are highly liquid. These securities have a low-risk, low-return profile. There are five types of cash equivalents: Treasury bills, commercial paper, marketable securities, money market funds and short-term government bonds. (Source: Investopedia)

Sounds familiar? They are like your POSB Savings Account that give you 0.05% per annum or 1-year Singapore government treasury bills. Even the new Singapore Savings Bonds can be considered as cash equivalents as it is highly liquid.

In Singapore, you can consider depositing your money in high interest bank accounts such as OCBC 360 Account, UOB One Account, CIMB FastSaver Account, to generate higher returns for your cash holdings in your portfolio.

~ BACK TO OUR STORY of Mr Rich ~


Mr Rich needs 3.76%

Mr Rich is a balanced investor

A balanced investor’s recommended strategic asset allocation will be..

45% in bonds, 45% in equities and 10% in cash equivalents

He should calculate the overall performance of his portfolio based on the annualised historical returns of the assets that he wishes to buy.

E.g. If Mr Rich buys the following:

ABF Singapore Bond Fund Index for bonds, 2.84% per annum since inception

STI ETF for equities, 10.29% per annum since inception

OCBC 360 Account that gives him 2.0% per annum

His portfolio returns will be (45% x 2.84%) + (45% x 10.29%) + (10% x 2.0%) = 6.1085% which exceeds his requirement of 3.76%.

However, past performance does not equate to future performance, so this is only a gauge that it is possible for him to get this portfolio return. 

Balancing his portfolio ever year based on Strategic Asset Allocation

Also, Mr Rich should relook at his portfolio and adjust accordingly every year.

For example, during next year, equities perform so well such that it represents 50%, he should sell the excess 5% in order to adjust it back to 45%. Similarly, when bonds underperform and represent 35% of his portfolio, he should buy more bonds to make up the difference to 45%. This, in essence, is what we call “Buy low, sell high”  – take advantage of the low prices to buy more and take profits when we are performing well.

A diversified portfolio is important for us to weather all kinds of storms because history as proven again and again that no single asset class will perform well every year. The performance of each asset class follows the business cycle – it’s just the natural way of how life is, we shouldn’t fight it but outsmart it.

However, if you are a person that would like to be in control there is also something else that we can tweak here to achieve better performance.

There are actually two ways that we can invest in these asset classes: Passively or Actively.


Passive Investing 

Passive investing is a way to maximise returns by limiting the buying and selling action. The main idea is to reduce the transaction fees that are paid from frequent trading. This is because the more transactions you make, the more it will eat up your returns.

Passive investing tracks or mimics the performance of a particular index or portfolio. The most common way is to buy a ETF or a mutual fund.

In Singapore, the most common way that you can invest passively is by purchasing both STI Exchange Traded Fund & ABF Singapore Bond Index Fund to form a portfolio. They mimic the Straits Time Index & iBoxx ABF Singapore Bond Index respectively.

Straits Time Index is regarded as the benchmark of Singapore Stock Market, i.e. if you buy the STI ETF, you are buying the entire Singapore Stock Market

iBoxx ABF Singapore Bond Index is regarded as the benchmark of bonds issued by the Singapore government or its agencies, i.e. if you buy the ABF Singapore Bond Index Fund, you are buying the entire portfolio of bonds issued by the Singapore government and its agencies.

There are a few ways you can passively invest. You can open a POSB InvestSaver Account or POEMS Blue Chip Share Builder Plan (OCBC Blue Chip Investment Plan is excluded as it does not have ABF Singapore Bond Index Fund). Both allows you to invest in both STI ETF and ABF Singapore Bond Index fund. All you have to do is to set up the plan and every month, a fixed amount will transferred via GIRO to purchase the units.

Certain months, when the prices are high, you will be able to buy less units. When the prices are low, you will be able to buy more units. This is called Dollar Cost Averaging. For example you have invested $100 each month. This month, the price of each unit is $1, you can buy 100 units. Next month, the price of each unit increased to $1.20, you can only buy 83.33 units (~83 units).

Over time, you will accumulate units and the value of your investment will be the number of units you have at that time multiply by the future price of each unit. This strategy believes in the long term growth of the assets.


Active Investing aka Stock Picking

Active investing is way to get short term gains through buying and selling of the assets. Active investors tend to monitor prices more frequently than passive investors. Typically, active investors seek short-term profits.

Famous investor Warren Buffett is an active investor. He does very in-depth research on the companies that he invests in and reads their annual report thoroughly before he invests. He invests in undervalued companies that eventually pays him off in the form of above-average returns when the value of these companies gets realised.

Passive Investing or Active Investing?

To determine which kind of investor you are, ask yourself these two questions.

Can I afford the time to do in-depth research of each stock that I wish to invest in? 

Do I have the confidence and skill to time the market and gain above-average returns than a typically investor?

If your answer is no for both questions, you fall under the category of passive investor. Just passively invest and you will be profitable in the long run. Focus your time and energy on other activities to increase your income such as self-development or starting a side gig to earn more income – this way you will have more money to invest in and your money will work harder for you.

AND THAT’S ALL FOLKS. The very basic-but-not-so-basic guide of Personal Finance Planning for people like me who was once very confused by all these terms but now am getting some clarity.

Do leave me a note or two about your thoughts on this series or basically anything about personal finance so that we can all learn together! Learning something new every day is something that I enjoy a lot as well :). And also if you like to read more about what I write, please subscribe.

Lastly, thank you for taking your precious time off in reading what I write. It really means a lot to me and it’s something that drives me! Thank you so much 🙂


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