[Expert Talk] Achieve long-term investment success through asset allocation with Freddy Lim from StashAway

Today’s guest is Freddy Lim, Chief Investment Officer and Co-founder of StashAway - an online investment management company headquartered in Singapore. We began with a market update focusing on the thought process investors can use to analyse current market conditions and the key reasons behind the decoupling of financial markets from the real economy. We then shifted our discussion to understand StashAway’s proprietary investment strategy, ERAA - namely the Economic Regime-based Asset Allocation and how ERAA can be applied to understand post-crisis recovery.

Top 5 Takeaways

Focus on aggregate numbers to make sense of what's happening in the market

A useful way to think about the combined economic impact of lost output due to Covid-19 and aggressive government stimulus is to look at how A compared to B in aggregate numbers. It is because the aggregate stock market and the aggregate multi-diversified portfolio only focus on the aggregate loss of output versus aggregate stimulus.

Money multiplier effect created through fractional banking explains the decoupling of financial markets from the real economy

A key reason behind the observed decoupling is the introduction of fractional banking which made "money multiplying" possible. When one dollar is deposited into the banking system, the bank is only required to keep a fraction of the dollar and can lend out the remaining, creating a multiplier effect in the real economy.

Asset allocation is the key determinant of differential portfolio returns

The majority of mid-to-long term return or loss is driven by the economic environment so the act of deciding how to allocate assets into a particular sector or industry is responsible for between 80% and 96% of a portfolio’s return profile. The remaining 10–20% of excess return (i.e. alpha) can be attributed to an investor’s superior ability to pick winners and losers but this is very tough to do successfully over a long period of time.

The importance of staying on course

For investors who have clearly defined their investing objectives and designed long-term investment plans, it is important to stick to these plans and not to make changes based on opportunistic movements in the market.

Staying invested is very key for long-term success

Markets are very dynamic and very hard to be predicted accurately. All investors want to buy low and sell high but many end up buying high due to FOMO or selling low due to the fight-or- flight response. Dollar-cost averaging is a great strategy to smooth things out during periods of high market volatility and help you stay invested in the game. Staying invested is very key for your long-term success. Ultimately you got to do everything you can to not get KO’d by the market.

Content at a glance with time-code

(01:27): Freddy’s professional investing background and what led him to co-found StashAway
(03:15): Focus on aggregate numbers to make sense of what’s happening in the market
(07:20): The decoupling of financial markets from the real economy explained
(14:06): Why didn’t we see the much-anticipated inflation happening during the recovery phase post 2008 financial crisis?
(15:46): StashAway’s proprietary investment strategy, ERAA — Economic Regime-based Asset Allocation explained
(19:54): Do the causes underlying each economic regime matter in asset allocation decisions?
(23:00): Asset allocation is the key driver of differential asset returns
(25:50): What does StashAway’s asset universe look like?
(36:52): Has StashAway’s investment strategy changed due to the crisis? What are the in-built mechanisms to respond to crisis situations?
(41:59): Answers to the most asked questions on StashAway 1) do I switch my portfolio from a low risk to the highest risk portfolio to take advantage of the market draw down? 2) should I invest more, accelerate my investing plan now?
(49:21): The unicorn discussion — StashAway’s decacorn potential

Episode Links

StashAway: https://www.stashaway.sg/
StashAway’s Asset Allocation Framework: https://www.stashaway.sg/r/stashaways-asset-allocation-framework