Case Study: Entry level into suitable asset class allocation for new investors

The case

“I’m a single 40 year old male with net savings of $65K and no debt or commitments. what sort of allocations would be suitable?”

My current personal assessment is:

$15K in cash

$25K in medium-liquidity assets with a 3 to 6 month lock in

$15K in low-liquidity assets with a 12 to 18 month lock in

$10K in equity

Is this reasonable or way too conservative?

Recently, we came across a question on Reddit that we feel resonates with many new investors. “Is my allocation too conservative?” is a common concern for new investors.

The approach

Start with your goal

Begin with the end in mind. Ask yourself: What are you investing for? For this example, let’s assume the goal is retirement at 65 with a portfolio that generates $3,000 monthly income. With 25 years to invest, you’d need roughly $1M by 65.

Determine your need for return

To reach $1M in 25 years starting with $65K  and a $1,000 monthly contribution, the required return (or need for return) is around 6.3%. This means a portfolio allocation like 70% global equities and 30% bonds is likely needed to hit that target.

Understand the risk

A 70/30 portfolio typically has an annualised standard deviation of around 9.83%. This means your portfolio could go up or down by that amount in an average year. Can you emotionally handle periods of decline, potentially as steep as 9% or more, without selling? If not, you may need to adjust your risk tolerance or expectations.

Investing isn’t just about numbers—it’s about behaviour

Sticking to a plan, especially during downturns, is critical. Emotional decisions often derail long-term goals. This is why many people turn to advisors, not just for portfolio management but for guidance and discipline throughout the journey.

Re-assess as life changes.

This isn’t a one-and-done decision. Over time, as your investments grow or your circumstances change, revisit your portfolio. You may want to reduce risk as you get closer to retirement or adjust based on changes in income or goals.

By focusing on goals, understanding how much risk feels right for you, and regularly fine-tuning your approach, you can make choices with confidence to reach long-term success.

Source: Dimensional Fund Advisors Ltd, Dimensional Global Core Equity Index, Bloomberg Global Aggregate Bond Index

Nokia’s Transformation: From Mobile Giant to Network Innovator

Many of us remember Nokia as the titan of the mobile phone industry, the brand that defined the early era of cellphones with its nearly indestructible models and memorable ringtones. To many, it seemed Nokia’s reign might have quietly faded into the annals of tech history, overshadowed by the rise of smartphones. However, the truth is far from it. Nokia has not just survived; it has evolved, transforming its core business in a bold move that showcases its adaptability and forward-thinking approach.

The Transition of Nokia’s Core Business

Nokia, once synonymous with mobile phones, has undertaken a significant shift in focus under the guidance of CEO Pekka Lundmark. The company has rebranded itself, shedding its 60-year-old logo and mobile phone identity to emerge as a leader in networks and industrial digitalization. This pivot reflects Nokia’s ambition to pioneer the future where networks meet cloud technology, marking a complete strategy overhaul.

This transition saw Nokia stepping away from phone manufacturing a decade ago to concentrate on telecommunications infrastructure and technology sectors, including pivotal areas like 5G networks, cloud services, and software-defined networking. While Nokia-branded phones continue to exist, thanks to HMD Global, Nokia’s own journey has taken a different path, emphasising its expertise in B2B technology innovations and its extensive portfolio of telecommunications and mobile technology patents.

Adapting to Market Conditions: Lessons from Nokia

Nokia’s journey teaches us the critical importance of adapting to market conditions. Recognizing the shift in the industry and consumer needs, Nokia understood that its strength and future lay not in fighting an uphill battle in the smartphone market but in leveraging its vast experience and capabilities in network technology. This strategic pivot, though daring, highlights a vital business principle: it’s never too late to adapt to changing market dynamics.

Applying Nokia’s Principles to Portfolio Rebalancing

The story of Nokia’s transformation mirrors the essential practices of successful investment, particularly portfolio rebalancing. Just as Nokia reassessed its core business and shifted its focus to align with future growth areas, investors must regularly evaluate their portfolios and adjust their asset allocations in response to changing market conditions and personal financial goals.

Portfolio rebalancing is not about conceding defeat; rather, it’s about recognizing when the landscape has changed and adapting your strategy accordingly. It’s about knowing when to hold on, when to let go, and when to diversify into new territories to ensure sustainable growth and stability.

Nokia’s partnership with Dell Technologies exemplifies its commitment to innovation and adaptability. By collaborating on advancing open network architectures and private 5G use cases, Nokia is not only expanding its footprint in the telecom ecosystem but also setting new standards for how businesses leverage network technology.

Conclusion

Nokia’s evolution from a mobile phone behemoth to a network and industrial digitalization pioneer serves as a compelling case study in adaptability, innovation, and strategic foresight. As Nokia continues to redefine itself and lead in its chosen domains, it offers valuable lessons for businesses and investors alike. 

The key takeaway is clear: success lies not in clinging to past glories but in the ability to anticipate future trends and pivot accordingly. In the dynamic landscape of technology and investment, being adaptable is not just an advantage; it’s a necessity.

Case Study: Paying down mortgage vs. investing

Embarking on the journey of homeownership often prompts a pivotal question: Should you direct your resources towards paying down your mortgage or invest? In this article, we dissect the crucial factors that guide this decision-making process, shedding light on interest rates, risk tolerance, and time horizon.

Interest Rates and Returns

At the heart of the dilemma lies the balance between the interest rate on your mortgage and the potential returns from investments. Understanding this interplay becomes paramount, as it directly influences the allocation of your financial resources.

Risk Tolerance

Consideration of your risk tolerance forms the backbone in this decision-making process. Mortgage payments assure a guaranteed return by chipping away at your debt, while investments introduce risks.

Time Horizon

Investing often thrives as a long-term strategy, reaping benefits over an extended period, while paying down a mortgage yields immediate advantages. We guide you through the evaluation of your time horizon, urging alignment with your unique financial goals and timeframe.

Case Study

Let’s look at a real-world scenario. Imagine you as a homeowner with a S$1 million mortgage, a 25-year loan period, and a 3% per annum interest rate. It would work out to something like this –

In the initial years, a significant chunk of the fixed monthly payment is allocated to covering interest expenses. However, the percentage of the monthly payment that goes toward interest decreases over time.

At the end of 25 years, your total cash outlay (incl. interest) is estimated at $1,422,633.94, meaning your total estimated interest paid is $422,633.94.

What if you were to make an additional $500/month principal repayment?

By doing so, you would finish paying off your mortgage around 3 years earlier with a total cash outlay of $1,360,445.13 with interest paid at $360,445.13. That means you would have saved $62,188.82 in interest payments.

Now, let’s look at what happens if you invested the $500/month instead.

Assuming you get an annualised return of 7%, this is what it will look like –

If you were to invest, you would have a total portfolio value of $304,937.65 with $174,937.65 in total returns. Your investment returns would be worth more than double compared to your interest savings of $62,188.82.

And if you were to continue investing $500/month until the end of 25 years, you would have a portfolio value of $407,398.56 with $257,398.56 in total returns.

As the numbers are laid out, the choice becomes clear. However, remember that the challenge lies not in making the choice but in creating and managing a portfolio capable of delivering an annualised return of 7%.

Whether you opt for the stability of reducing mortgage debt or the potential growth offered by investments, the key lies in aligning these decisions with your unique financial goals.