With just three months left in the year, it's an exciting time to watch how our portfolio might perform as we approach the final stretch. It's also a good time to reflect and consider adjustments to our investments for the new year.
Earlier, I mentioned shifting part of our allocation towards the U.S. market. Increasing that exposure significantly will depend on higher returns from the U.S. market, which could provide the buffers we need after careful consideration. If those returns don’t materialize, this roughly 10% allocation may remains through 2025, as the plan is to rely mainly on internal growth.
Allocation of U.S. equities will be somewhat like a "peanut butter spread" across strong businesses, with varying weightings on a few. It's quite hard to predict which will perform best, but over time, the earning power of each should drive them forward. Minimum expectation is that these investments earning should outperform local banks. The risk lies in macroeconomic factors where the entire market could be driven down.
REITs and banks will continue to dominate the portfolio. Depending on market conditions, fresh funding may either stay invested or be redirected toward fixed-income instruments like T-bills. Another alternative could be reducing loan exposure.
For local portfolio adjustments, the focus will be on gradually weeding out underperforming companies, regardless of whether they are currently profitable. This will happen as opportunities arise. Releasing capital from these positions will allow reallocation to higher-yielding stocks, aiming to boost dividends, which are expected to remain flat for 2024 unless we take action. We have to be careful not to increase holdings just for the sake of it. Considerations include whether the price is running ahead of itself, yield returns, future expectations, and cash flow situations.
Here is a snapshot of current equity portfolio. The return of Microsoft (MSFT) to support the peanut butter strategy plan.
New Funding
Our goal remains to optimize and grow the dividend stream, even with a significant portion of funds tied up in T-bills, Singapore Savings Bonds (SSBs), and multiplier accounts that we try not to touch. The big catalyst is the boost of funding from retirement payments. There are a few options to consider, and the final plan may be a combination of these:
Pay Off Housing Loan: This can be reserved in case re-pricing does not work out. Ideally, we would continue to extend the loan so that we can use the money for investments with higher returns. For this reserve to work in the future, we probably need to park the funds in capital-protected instruments until utilized. The downside of this plan is potentially losing the key funds that can help generate significant income.
U.S. Equity Boost: U.S. market valuations seem relatively rich. There is reluctance to further increase exposure, as the "peanut butter strategy" has been completed. I would prefer to invest after a market correction for a margin of safety if we are to tap into these funds. Another concern is the lack of dividend play in this segment while we wait. The only situation where I would consider adding is if there is a rebalancing of the existing portfolio allocation towards weaker stocks.
Increase REITs Allocation: Earnings-wise, REITs are still not able to match the banks. While there is a lowering of Net Interest Margins (NIM) for the banks, there will be a lag in the implementation of lower loan costs for the REITs. Most of them won't see significant cost reductions, if any at all. The timing is not right for this yet, and there is a warchest of funding if needed.
Increase Banks Allocation: Currently, the portfolio has significant exposure to banks already. The appetite to further increase this segment may not be good as interest rates have started lowering. There is a limit to how much we can increase, and it may not work for the fund. If there is a major correction, it may be helpful to tap some of the funds, but this also means existing profitability will be impacted.
Fixed Returns: Current fixed returns are coming down; however, they are still relatively high. This option can also be considered an expanded warchest—a safer option with sufficient income. It's a good reserve to support major emergencies, such as paying down the home loan if forced to. There is a time factor in this for the housing loan. It appears that a large segment will probably be allocated here for opportunities or needs.
No Chinese stocks yet. Sleep well.
Cory Diary
2024-10-10
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Disclaimer: The articles presented in this blog reflect personal opinions and are intended for informational and sharing purposes only. Not responsible of errors. Readers are advised to seek professional guidance when making financial decisions and should take full responsibility for their choices.
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