How StashAway Diversify and Hedge Their Investments
I was first introduced to StashAway a few years ago by a friend residing in Singapore. I looked them up online and realized it was a “Robo-advisor” platform. Back then, I was skeptical of these Robo platforms. I remember reading a particular article that stated nearly 80% of “Robo investment” platforms in North America ended up being a failure and the majority of them are meant for trading and not for investing.
I immediately jumped to conclusion that StashAway was similar to these failed platforms and decided not to pursue further. It was only quite recently I realized I was a victim of availability bias. I read few articles and made up my mind without researching further. I just assumed all “Robo-investing” platform uses some algorithm to buy and sell securities and not meant for long term investing.
The Platform I Was Looking For
Anyway, early this year I did spend some time learning about them and realized almost all my assumptions about them were misplaced. And the worst part, it was exactly the platform I was looking for.
For some time now I have been looking for a platform offering investment into:
1. ETF security
2. concentrated in the US market
3. cheaper commission fees
StashAway provides these offerings. But what really caught my attention is how they manage risk by diversifying and hedging their investments across different asset classes and regions. When it comes to investments, I’m a sucker for both these risk management strategies as they act as a protection against my own ignorance.
I previously shared how EPF diversifies its investments and how gold can act as insurance against currency devaluation. In this post, I’ll share how StashAway diversifies and hedges its investments. Before that, some minor notes.
StashAway offers two main investing options.
1. Goal-based Investing, and
2. General Investing. Under General Investing, there are two more options.
b. Higher-risk Investing
For the benefit of this post, I’ll concentrate solely on StashAway’s Higher-risk General Investing portfolios. These portfolios are known as StashAway Risk Index (SRI) and there are three main SRIs. They are SRI 26%, 30%, 36%.
Taking SRI 36% as an example, StashAway explains “There is a 1% chance that this portfolio value will lose more than 36.0% of its value in any given year.” I personally like how they stress the risk investors are taking and not concentrating on the returns.
From the above diagram, StashAway diversifies their ETFs investments across:
1. Asset Classes – Equities, Commodities (Gold), Fixed Income (Bonds), Real Estate (REITs), Cash (USD)
2. Regions – US, China, Global, Asia excluding Japan, Emerging Markets
3. Sectors – SmallCap, Consumer Staples, Consumer Discretionary, Healthcare, Technology
This diversification offers investors exposure to these different asset classes, markets, and sectors. And why this matter? As Peter Bernstein once mentioned “I view diversification not only as a survival strategy but as an aggressive strategy because the next windfall might come from a surprising place. I want to make sure I’m exposed to it.”
I have also shared how each SRIs have a different weightage allocated to them. Example, SRI 36% has more exposure to International Equities (33%) but lesser exposure to US equities (39%) compared to SRI 26% and 30%. But the overall equities exposure for SRI 36% is 72% (33% + 39%). Therefore, SRI 36% has a higher risk compared to the other two SRIs.
Notes on ETF
If you are interested to learn more about each ETF, you may check them out at www.etf.com. Just search for the ETF’s name and it will display information of the countries, sectors, and companies the ETF is invested into. As an example, below is a screenshot of XLY (Consumer Discretionary) ETF.
Effect of Diversification on My SRI 26% Portfolio
Diversification is about accepting good enough while missing out on extraordinary so you can avoid terrible.Ben Carlson – A Wealth of Common Sense
I personally have started investing monthly into SRI 26% since February 2021. I chose SRI 26% because I was looking for more exposure into the US equity market and lesser into Asia, Emerging Markets, and REITs since I have already heavily invested in these markets via unit trust.
Below is the performance of my portfolio as of 10th July 2021. You will notice KWEB (China-Tech) ETF is performing poorly -34.82% (due to the recent CCP Internet anti-trust law), but the other ETFs, especially the US ones are performing pretty well. This is the effect of diversification.
Am I concerned about China-Tech ETF’s performance? Not really, due to three reasons:
1. The total weightage of KWEB ETF is only 12% of the overall portfolio.
2. I’m doing monthly investments into this portfolio with a long-term mindset. This allows me to buy more units when certain ETFs are down.
3. In my opinion, the China-Tech sector will perform well over the coming years. What is happening now with the antitrust crackdown is just unfortunate.
Legal brothels offer something women can’t get on their own: safety in exchange for earnings. Brothel work is what is known in finance as hedge: giving up some of your potential earnings in exchange for reducing risk.Allison Schrager – An Economit Walks Into a Brothel
What really surprised me with StashAway investment is their allocation into Gold. I can be wrong but as far as I know, not many fund managers or investing platforms out there include gold in their investment portfolios. In fact, “gold bashing” is quite common in the finance industry, claiming it is not an investment.
StashAway’s overview on gold though is along the following lines. “The functional role of Gold in a portfolio is often overly simplified to being an inflation hedge… we think it is more accurate to view Gold as a “tail” hedge – an asset class that cushion a portfolio against extreme economic scenarios.”
However, 20% allocation into gold was a bit too much for my own liking. I personally would have preferred 10% exposure at maximum. But after digging further, I came across the following article from StashAway dated 14 May 2020. This was about one month after the first Movement Control Order (MCO) due to the Covid pandemic. In the article it was clearly mentioned they were re-optimizing portfolios by “reducing US Dollar exposure, increasing Chinese exposure, and for some portfolios, increasing exposure to Gold.”
And the reason they were increasing exposure to Gold was that gold “offers protection against the dilution of paper money”. This is hedging against currency devaluation done by central banks, especially the FED, of printing money to stimulate the economy.
The article also made me understand how StashAway uses economic data as its investment framework. Their investment strategy algorithm known as Economic Regime-based Asset Allocation (ERAA) helps them determine the next course of action.
Overall, I’m glad StashAway is available for us in Malaysia. Besides having exposure to ETFs and US markets, I like how they manage risk by diversifying and hedging. I truly believe they have the investor’s best interest at heart.
Besides that, I think they have a simple but friendly user interface (UI) for both the mobile application and desktop version. I also love reading their market commentary, insights, and articles to understand why they do what they do. They are transparent and they keep their investors informed. Do check out their resources and FAQ pages too.
And before I forget, an important disclaimer. I’m not affiliated with StashAway in any way. I’m just one of their investors. And if I get any information wrong, do let me know and I will amend them accordingly.
Update 21st July 2021
Ten days after publishing this post, StashAway decided to re-optimize its existing portfolios. I think it’s only fair I provide the latest chart of the asset breakdown. Having said that I don’t plan to update this post frequently as the goal was to highlight diversification and hedging.
You may click this link from StashAway to understand why they have decided to change the portfolio. It’s mainly due to inflation/disinflation.
Due to the changes to the portfolio, I have decided to readjust my portfolio risk from SRI 26% to SRI 36% to align with my initial requirement of investing more in US equities. Moreover, the gold allocation has also dropped from 20% to 4.5% for SRI 36%.
A part-time Malaysian blogger writing his thoughts online. Interest in both personal finance and economics, mainly the behavior aspect of them. I consider myself Poyo since I do not have any significant credentials in both fields, so readers beware. Thanks for reading.