20 August 2010

Unit Trust

For a beginner in Unit Trust investment, it's such a mystical and confusing world.  Well, not really.  There are tons of books on the subject.  In other countries, it is better known as Mutual Funds.

Unit Trusts (UT) are much touted as providing diversification within its given mandate.  For instance, an equity UT with a mandate of Singapore stocks is likely to be holding 20-50 different stocks from SGX.  But with so many choices out there, what should one pick to buy?

After much trial and error, I have reached the conclusion that it is best to keep things simple.  More importantly, is to further diversify by investing into different regions. This thinking is shaped by my earlier experiences from ILPs.  My ILP invested solely in Tech and Biotech had fallen off the cliff horribly in the aftermath of the dot.com era. In contrast, an ILP which was invested into Singapore Equity had performed stoutly and robustly.  Historically, markets go up, markets go down.  Who knows where the wind will blow in the future?

Often, one hears that while markets go up and down, in the longer term, it ALWAYS go up.  While this appears to be generally true, one would have to note that the Japanese markets had behaved quite differently for many years.  Sometimes referred to as being "L"-shaped hence.

A simple portfolio would therefore be to distribute equally amongst the following:

- US equity - e.g. Infinity US 500 Stock Index [underlying fund is a Vanguard indexed fund]
- European equity - e.g. Infinity European Stock Index [underlying fund is a Vanguard indexed fund]
- Asia Pacific ex-Japan equity - e.g. Aberdeen Pacific Equity
- Global Emerging Market equity - e.g. Aberdeen Global Emerging Market
- Singapore equity - e.g. Aberdeen Singapore Equity

And to then top up a regular sum at fixed intervals, be it monthly, quarterly, or whatever it may be.  Each time, topping up across the funds so as to bring them to an equal keel as far as possible. 

And once each year, in a fixed month, rebalance by selling that which has grown significantly, and buy in to that which is underperforming.  This approach is essentially betting on the market to generally revert-to-mean in the long run.

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