Building a balanced unit trust portfolio can be easy and formulaic

Building a balanced investment portfolio is key to achieving long-term financial goals, especially when planning for retirement. For Malaysians in their 20s and 30s aiming to withdraw their investments by age 55, unit trusts offer an excellent way to diversify your portfolio across multiple asset classes. This article will walk you through the steps of creating a balanced portfolio using unit trusts that includes equities, mixed assets, bonds, fixed income, and money market funds. We will also touch on ringgit-cost averaging and the benefits of sector-focused investments.

Why Build a Balanced Portfolio?

A balanced portfolio combines different types of assets to spread out risk while seeking stable returns. For someone in their early career life, this means having enough exposure to high-growth investments like equities while maintaining some conservative investments like bonds and fixed income to cushion against market volatility. Over time, as you approach your withdrawal age of 55, the balance between risky and conservative investments can shift to protect the wealth you've built.

Asset Classes for a Balanced Portfolio

A balanced portfolio typically consists of a mix of the following asset classes:

1. Equities (Stocks)

• Purpose: Provides growth potential.
• Risk: Highest, but offers the highest potential return over time.
• Possible Allocation: Around 50% to 60% of the portfolio can be in equity funds. You have a longer investment horizon and can afford some risk in exchange for growth.

2. Balanced and Mixed Assets Funds

• Purpose: Balances growth with capital protection by investing in a mix of equities and bonds.
• Risk: Moderate to High, as these funds blend different asset classes.
• Possible Allocation: Around 20% to 30%. These funds provide a cushion during market downturns, balancing the risks from your equity investments.

3. Bonds/Fixed Income Funds

• Purpose: Provides income and stability.
• Risk: Lower than equities, as these funds invest in government bonds and high-grade corporate bonds.
• Possible Allocation: About 10% to 15%. This helps reduce volatility in your portfolio while generating steady income.

4. Money Market Funds

• Purpose: Provides liquidity and capital preservation.
• Risk: Low, but returns are also lower compared to other asset classes.
• Possible Allocation: Around 5% to 10%. Money market funds act as a safety net, providing easy access to cash without exposing your portfolio to market risks.

Practical Steps to Building a Balanced Portfolio

1. Determine Your Risk Tolerance

At age 20s to 30s, with a long investment horizon until 55, you can take on more risk. However, if you're risk-averse, you may want to allocate a smaller portion to equities and a larger portion to bonds or fixed income.

2. Select the Right Unit Trust Funds

• Equity Funds: Look for both local, regional and global exposure. For example, you could allocate 30% to Malaysian equities, 30% to ASEAN and Far-East equities, and 30% to global equities (e.g., USA technology or healthcare sectors)
• Balanced & Mixed Assets: A unit trust fund in this category can serve as a core holding, balancing your portfolio with both equities and fixed income
• Bond / Fixed Income Funds: Select a mix of local government bonds and corporate bonds through unit trusts to provide stability
• Money Market Funds: For liquidity, ensure you have around 5% to 10% in short-term, low-risk funds for emergency purposes or market opportunities.

3. Ringgit-Cost Averaging

• What It Is: Ringgit-cost averaging (RCA) involves investing a fixed amount of money regularly (e.g., monthly), regardless of the market’s performance
• Benefits: RCA allows you to buy more units when prices are low and fewer units when prices are high, averaging your purchase price over time. This strategy reduces the risk of mistiming the market and can smooth out the volatility of equity investments
• How to Apply: Set up an automatic monthly contribution to your selected unit trusts. For example, if you invest RM 500 per month, over time you may reduce the impact of market fluctuations and build a significant amount of units as the market moves up and down.

Leveraging Sector Investments for Growth

You can also take advantage of sector-focused unit trust funds that align with economic trends. Examples:

• Technology Sector: With the growth of digital transformation, semiconductor, artificial intelligence (AI), and cloud computing, funds that focus on technology stocks could offer high growth potential
• Banking Sector: Banks are one of the primary foundations in the fiscal running of a country. Investing in this sector would be a strategic foundation in one's portfolio
• Manufacturing and Industries Sectors: These industries are key to a developing nation, as they create skilled workers and healthy input/output of materials
• Construction, Real Estate and REITS Sectors: A country's growing populace always points to expansion in these sectors, as residence and commercial infrastructure needs to be built, for both owners and tenants alike
• Healthcare Sector: As healthcare innovation accelerates globally, funds investing in local, regional or global pharmaceutical or healthcare services firms can be a smart long-term bet
• Green Energy: With the rise of sustainability and renewable energy, investing in funds focused on green technologies or ESG (Environmental, Social, and Governance) sectors may yield significant returns in the future.

Regular Review and Rebalancing

Your portfolio’s balance will shift over time as the performance of different asset classes fluctuates. As you get closer to your retirement age, you should adjust your portfolio to reduce risk by shifting more into bonds and money market funds. A good rule of thumb is to review your portfolio annually or when there are significant market events, and rebalance it to maintain your desired allocation.

For example, if your equity investments perform well and grow to make up 70% of your portfolio, you might want to sell some equity units and invest more in bond or fixed income funds to return to your target allocation.

Conclusion

Building a balanced portfolio with unit trusts is a smart way to grow wealth while managing risk. By diversifying across asset classes—equities, balanced, mixed assets, bonds, fixed income, and money markets—you can maximize growth potential while preparing for a comfortable retirement at age 55. Using strategies like ringgit-cost averaging and sector investing can further enhance your portfolio's growth.

Start early, stay consistent, and regularly review your investments to ensure your portfolio remains balanced and aligned with your financial goals.