We find out a little bit about you by asking about your feelings towards investing to determine how much risk you can take. We then ask you to create financial goals where we ask you a couple more goal-related risk questions. Your answers provide a risk-scoring which gives us a pretty good idea of your risk profile and what portfolios to recommend you.
We ask you to broadly guesstimate two things for our calculations. Firstly, your costs in today’s values. For example, we will ask you about your desired retirement living costs or your children’s education costs based on what those costs are today, not complicated estimates of what they will be in future. In certain instances like children’s education where you don’t know what to estimate, we put in a default number which we think is reasonable. Secondly, we will ask about your feeling of personal or general inflation rates of your lifestyle or the product you want to spend on. Again, if you don’t know what to put in, we will default to a reasonably assumed inflation rate. We then apply these numbers to your recommended portfolios based on what returns they have given in their long term history and work backwards to give you the required monthly savings. If you stick with this recommended monthly savings over the timeframe you have given us, there is a high chance to ably fund your future goals.
Of course, nothing is guaranteed and nothing is 100%. Our portfolio selections will tell you how much you can expect to lose during a certain time period based on their past behaviour over the very long term. Less risky portfolios will be more stable in the short term but give lower returns. More aggressive portfolios will expose you to bigger ups and downs in the short term but will give you higher returns over the long term. Therefore, it’s always a good idea to invest according to your risk preferences and goals. The other thing is that we always ask you questions about your habits and your aspirations which you know better than us which we can use to give you a principle-based investing plan. The objective here is not accuracy but to have some investment rather than none as a way to get you closer to your goals.
We believe that because you can’t predict anything with 100% certainty, the best-diversified stock portfolio will be a global portfolio. We use exchange-traded funds or ETFs because they reflect indexes or benchmarks, and index experts like MSCI have applied certain filters to construct indexes which they believe represent the growth (or lack of) in global and regional asset classes or types. We have broken down the asset classes of the global stock portfolio into the US, non-US developed and emerging markets. This covers pretty much the whole world but we broke them down to three regions instead of going with one global ETF (which exists) to give us more flexibility to vary holdings according to risk levels eg. availability of a separate emerging market allocation allows us to fine-tune a higher risk and higher return portfolio. At the same time, this allows us to maintain the simplicity of the idea of a global portfolio.
As for bonds, good benchmarks are hard to come by for various technical reasons which we won’t go into here. Because the US dollar is still the world’s major currency, we have used mainly US government bonds, the safest among US bonds, to reflect the bond allocation for longer-term goals. From that universe, we are using short-, intermediate- and long-term US government bonds. For shorter-term and income goals, we will be using a lot of Ringgit bonds and money market instruments.
The combination of the stock and bond allocations in your portfolios will make them fairly efficiently diversified. We have created 10 portfolios which reflect 10 stock and bond combinations according to what fits your risk preference indication. For more please see our Investment Policy paper.
From here we will select ETFs according to a few criteria:
The following ETFs have been selected for inclusion into our portfolios:
|ETF||Ticker||Asset Class||Avg Daily Volume (USD)||Years Estd||Total Expense Ratio||Tracking Error||Replication|
Vanguard S&P 500
iShares Core MSCI EAFE
|IEFA||Developed Markets ex-US Equity||973m||7||0.07%||0.07%||Optimised|
iShares Core MSCI Emerging Markets
|IEMG||Emerging Markets Equity||1000m||7||0.07%||0.07%||Optimised|
Vanguard Total International Bond
Vanguard Total Bond Market
NOTE: ETF expense ratios go to 3rd party ETF managers and are NOT part of Akru's advisory fee.*IG = Investment Grade; TER = Total Expense Ratio
When investing as an individual, there are minimum trade sizes and high transaction costs imposed on the account, and this makes investing as an individual fraught with hidden indirect costs. If you did it yourself, it would also be hard to have the clarity of setting up many goals as most trading accounts are consolidated. Plus you won’t be able to estimate the required monthly savings quickly. Akru absorbs all trade-related costs like brokerage, custodian fees and remittance fees. With Akru, you will benefit from the constant monitoring, rebalancing and re-optimisation that we provide. Moreover, Akru can offer fractional shares to make your portfolio more precisely allocated that is nearly impossible if you were to do it on your own - you can’t buy less than one share. The more prohibitive the DIY situation, the more you’re turned off investing, the less wealth you accumulate. In short, our platform is one way of avoiding behavioural pitfalls! (See also, “I'm an expert. Are robo-advisors better than doing it myself?”)
Prices of your portfolio holdings will move all the time making their allocations drift away from the recommended proportions. Rebalancing is the process of buying and selling ETFs to “fix” holdings back to their original recommended proportions. This is done so that your portfolios stick to the level of risk you’ve selected. Imagine a cup of tea with the sugar component getting bigger and bigger. Rebalancing is the technical process of fixing the sugar back to your preferred level so that you can have a perfect cuppa. Akru’s algorithms are constantly doing “soft rebalancing” with incoming funds to keep your overall allocations closer to recommended allocations without affecting the recommended allocations of the incoming funds. Once a year we do a “hard rebalancing” which fixes any allocation drifts of 5% or more.
The amount of money you want to invest will rarely match the prices of the ETFs in their exact proportions in the recommended portfolios. This is influenced by the constantly moving ETF prices, USD to RM exchange rates, your income, your evolving goals and your investing appetite just to name a few. Fractional allocation is the process of investing money that is not enough to buy one ETF. Eg. Say you want to invest RM100 which converts to USD25. Say for simplicity your recommended portfolio asset allocation is 80% ETF A and 20% ETF B. ETF A is $250 and ETF B, $13.75. Given that you are only investing USD25, you will be able to only buy one share of ETF B. This results in 2 problems: 1. You would have allocated 55% in ETF B when the recommended is only 20%. 2. You would have left the other 45% of your money uninvested. The incorrect asset allocation and uninvested money are not good for your goal achievement. Akru has the ability to deploy 100% of your funds very close to the proportions or allocations of the recommended portfolios by facilitating fractional allocation. In other words, we will be able to get over size mismatches by allocating your funds into 80% ETF A and 20% ETF B regardless of your savings amounts.