Investors need to consider their investment horizon and risk tolerance level in order to determine the right mix of assets in their investment portfolio, says Abel Lim, UOB head of wealth management advisory and strategy.
One’s investment horizon can be determined by an investors’ financial goals, which usually belong to one of these three categories, short-term goals, medium-term goals and long-term goals.
Short-term goals can include saving for an emergency fund, vacations or a wedding, and funds for such goals need to be kept liquid with minimal volatility. Examples of such investments include cash equivalents like short-term fixed deposits, high yield-saving accounts, money market funds and short-term government bonds. They are stable instruments and can be easily used at minimal cost.
Medium-term goals include a down-payment for a house or children’s education. This requires a balanced approach of both bonds and stocks. Bonds offer stability and regular income, while stocks boost capital growth. This balances risks and aims to yield returns that exceed inflation.
Lastly, long-term goals broadly refer to retirement savings. A longer time period allows an investor to ride out short-term volatility, allowing for a higher allocation to stocks. Stocks generally provide the highest returns long term, making it suitable for accumulating long-term wealth.
Besides the duration of an individual’s goals, one’s portfolio should take into account risk tolerance. Lim states that an aggressive investor with higher risk tolerance may favour stocks while a conservative investor with lower risk tolerance would favour a higher allocation to bonds and cash equivalents.
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According to Lim, the macroeconomic environment should also impact portfolio allocation decisions. He notes that the investment climate might lean towards a risk-taking approach given resilient economic growth despite high interest rates. However, global interest rates are expected to dip as inflation falls. While interest rate “remains sticky”, Lim states that UOB expects the US Federal Reserve to cut rates twice this year, in September and December.
It is likely that cash equivalents such as fixed deposits and money market funds will become less appealing to investors when interest rates fall.
With slowing inflation and global manufacturing stabilising, risk assets like stocks are becoming more attractive. UOB is positive on quality global stocks and investors should seek opportunities beyond mega-cap technology names in the US, Lim says. He notes that diversifying into quality and dividend stocks across various sectors and regions can be beneficial.
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Meanwhile, Lims says that Asian dividend stocks, outside of Japan, are “particularly attractive” given resilient business activity in Asia, enabling companies to provide steady dividend distribution. Furthermore, they benefit from attractive valuations compared to other regions, offering an overall advantage.
Beyond interest rate cuts, Lim notes other industry trends worth watching. This includes advancement in treatment for lifestyle diseases such as weight-loss drugs and the growing demand for medical technology and equipment. These secular trends will drive the growth potential of the healthcare sector, Lim says.
Furthermore, diversifying into the healthcare sector offers access to defensive pharmaceutical companies which perform well in slowing economies, alongside high-growth areas such as life science tools and services, healthcare technology and equipment. Therefore, Lim recognises this sector as a “good addition” to an investors’ portfolio as it offers both short-term and long-term opportunities.
