When we talk about the concept of financial planning, many people may think that it’s very complex and comprehensive, and may require a lot of information such as total income, overall expenses, liabilities, value of personal assets, investment assets and so on. While this is undeniable, to help you achieve your financial goal, this data can’t be ignored. However, it can also be as simple as ABC – let’s use football as an analogy to relate it to your asset allocation.
What is asset allocation?
In layman’s terms, asset allocation is an investment strategy that diversifies money into different kinds of asset classes. It aims to balance the risks and optimise the returns. In order to have good asset allocation, a financial planner will distribute the capital into various asset classes with different levels of risk and return, so each will behave differently over time. Since each person has different kinds of goals, risk tolerance, and investment horizons, a financial planner will analyse his/her financial characteristics and apportion a portfolio’s assets that’s suitable for him/her.
How to allocate assets?
As mentioned earlier, we’ll use football as an analogy to break down the best way to allocate assets. There are 11 players that make up a team that plays the game, which consists of a goalkeeper, defenders, midfielders and strikers. All of them are unique and have their own role to play. The same analogy also can be applied to our financial planning. Each financial tool represents a football player with an important role to play in personal financial planning. As we always say, don’t put all your eggs into one basket, hence you must diversify the risk and purpose by using different financial tools.
Goalkeeper – Emergency funds
The goalkeeper is the one standing at the last line of defence to make sure that the team won’t lose. His main job is to block shots from the opposing team to avoid giving up a goal. In the context of financial planning, who are our goalkeepers? Insurance and emergency funds probably fit the criteria.
Insurance protects you from financial risks by transferring the risk to insurance companies, while emergency funds are used to overcome unpredictable events like unemployment or sudden loss of income. However, many people don’t pay serious attention to this and even procrastinate on insurance and emergency funds. This results in them being financially vulnerable to unpredictable crises ahead.
Defenders – Capital guarantees
Apart from goalkeepers, the next line of defence are the defenders. Their main purpose is to offer protection to the goalkeeper and goal, and also preventing the opposition team from creating goal-scoring opportunities.
In the context of financial planning, these financial instruments are designed to provide stability for your funds, with capital guarantee often the priority. Examples of these financial instruments include fixed deposits, money market funds, your Employment Provident Fund (EPF), and bonds, which provides you with a stable income and principal guarantees for your investment.
Midfielders – Collective investment vehicles
Midfielders are positioned between attack and defence. These players act as the road maps, determining the direction of the play. They have the flexibility to be either attackingly aggressive or more defensive when needed, depending on the situation. Collective investment vehicles make great midfielders because these financial tools possess a diverse set of characteristics thanks to interventions from professional fund managers.
Strikers – Profit-making machines
Lionel Messi, Cristiano Ronaldo, Harry Kane, Robert Lewandowski – these are examples of world-famous strikers. Their fame is thanks to the goals that they score, often resulting in their team going on to secure victory. In investments, the striker’s main goal is to score for profits!
Take your private businesses for example, which will generate income for you. You’re likely to spend a lot of time, capital, and energy on your business due to the potential it has to give you the best returns. However, if you fail to have a backup plan and blindly chase profits, when unpredictable events occur, it may be hard for you to rise again. Examples of investments or financial tools which play the role of a striker include equities, derivatives, and leveraged real properties.
In a football game, there are 11 players on each team, but aside from the players, there’s still another important role that can’t be ignored. Without a coach giving instructions, there is no game plan for the team.
Coach – Financial planners
This is the 12th man in the game. Although he’s on the sidelines, he also plays an important role. Without the coach, can you imagine how the players can win the game? In the same situation, without players, do you think that the coach can win the game? In financial planning, the role of coach is often played by a financial planner.
He/she will advise you based on your financial goals, risk tolerance, and investment horizon. This information is important as your financial planner will analyse and determine the best course of action based on your unique situation. This results in a very specific financial plan which is tailored just for you.
The way of allocating assets can make a huge difference when it comes to seeking financial freedom. In the long road of a financial journey, you are likely to undergo many challenges in life such as economic cycles of market expansions, peaks, contractions, and troughs from time to time. Going through the four stages of an economic cycle requires great emotional management and smart financial strategies. So, it’s highly recommended for you to engage a licensed financial planner and approved financial adviser to ensure your financial well-being ahead.
About the author
Teoh Shoon Yee (FAR CMSRL RFP BIBM) is a FA Manager, Licensed Financial Planner and Bank Negara Approved Financial Adviser Representative with approximately nine years of experience in financial services. She is well versed in holistic, independent and unbiased approach with a pleasant and friendly personality. She can be contacted at ShoonYee.Teoh@yesfinancial.co