95) Unit Trust Asset Allocation for Retirement

95) Unit Trust Asset Allocation for Retirement

In Unit Trust Investments, there are 3 main asset types:
a) Equity
b) Bond
c) Money Market

You can group Bond and Money Market as Fixed Income. So, now there are only 2 asset types.

Constructing a balanced portfolio means allocating different percentages of your investment amount into the 2 asset classes. The models determine the percentages of your asset allocation into the Equity and Fixed Income funds.

Equity funds are more volatile and may give high returns. However, equity funds can give negative returns in a bad stock market year. Fixed Income have more stable returns and usually gives positive returns every year.  With a combination of both Equity and Fixed Income funds, you will be able to balanced out the returns.

Below are 3 Asset Allocation models for Retirement. The 3 models below are very simple models to follow.

A) PRS Model
Private Retirement Scheme (PRS) is a scheme for retirement purpose. The model uses your age to determine your asset allocation into the Equity and Fixed Income funds. A younger person will be able to take higher risk. Furthermore, a young person can invest longer before the retirement age.

The PRS model divides into 3 age groups:
a) Below 40 years old
Asset Allocation:
Equity: 70%
Fixed Income: 30%

b) Above 40 to below 50 years old
Asset Allocation:
Equity: 60%
Fixed Income: 40%

c) Above 50 years old
Asset Allocation:
Equity: 20%
Fixed Income: 80%

 

B) Rule of Thumb Model

Rule of Thumb also uses the age as the allocation to Fixed Income investments. Your age is used as the percentage into Fixed Income funds.

a) Age 25 years old
Asset Allocation:
Equity: 75%
Fixed Income: 25%

b) Age 40 years old
Asset Allocation:
Equity: 60%
Fixed Income: 40%

c) Age 65 years old
Asset Allocation:
Equity: 35%
Fixed Income: 65%


C) Benjamin Graham's Model
Benjamin Graham's model uses the individuals risk profile to determine the asset allocation models. An aggressive investor should allocate more into Equity funds. A Conservative investor should allocate more into the Fixed Income fund. While the Moderate investor have equal percentages into Equity and Fixed Income funds.
 
a) Aggressive Investor
Asset Allocation:
Equity: 75%
Fixed Income: 25%

b) Moderate Investor
Asset Allocation:
Equity: 50%
Fixed Income: 50%

 
c) Conservative Investor
Asset Allocation:
Equity: 25%
Fixed Income: 75%

With the 3 different models, you have a guide on how to allocate your investments. In each Equity and Fixed Income funds, there are many funds to choose from.

In Equity funds, you can further diversify your funds by choosing different funds. There are many funds with different investment objectives. Do understand how you can invest into funds from different countries and regions, market capitalization, fund objectives, etc.

Do look around in the internet for the different models recommendation. There are many different models to choose and follow. The important thing to know is to diversify your investments into different asset types to spread your investment risk.

Another thing to note is that you have more fund choices if you have larger amount to invest. Investments using cash is also more flexible compared to using your Special Retirement Funds.  

Do consult professionals and understand your requirements.