The Evolution of Asset Allocation in an Ordinary Family

Ask AI · How does Ms. Zhang start building an asset allocation system from scratch?

On April 2nd, the third episode of China Merchants Securities Global Fund’s “Decade Commitment · Fund Investor Theater” officially launched. This episode focuses on family asset allocation. We invited Ms. Zhang, a 10-year fund holder, to have a dialogue with Zhai Xiuhua, fund manager of China Merchants Securities Global Fund, and Yang Tiannan, host of the podcast “Understanding the Rise.”

In this episode, we aim to answer three questions through the real 10-year experience of an ordinary investor, with the help of a professional fund manager’s perspective: Why must ordinary people do asset allocation? How can ordinary people do a good job of asset allocation? And what exactly should we do?

Ms. Zhang is a female professional born in the 80s. She started trying to invest ten years ago, with her investment scope gradually expanding from A-shares to Hong Kong stocks, overseas assets, and commodities.

Zhai Xiuhua is Deputy Director of the Fixed Income Department at China Merchants Securities Global Fund. With 15 years of experience and managing assets of 200 billion yuan, she manages a variety of products including money market funds, fixed income, and fixed income+ products. Asset allocation is a key part of her daily work.

Starting from a spectrum of assets

Yang Tiannan: I want to ask Ms. Zhang first, you started investing in funds in 2015. Did you have the concept of asset allocation back then?

Ms. Zhang: Certainly not at that time. The market in 2015 first surged sharply, then plunged. I bought some stocks then, but the decline was severe. I felt that trading stocks was too risky, so I thought it would be safer to let professionals manage it. I allocated about 20% of my assets into funds, but most of my assets were still in cash. After buying, I also learned some professional knowledge. I remember reading a book called “John Bogle on Mutual Funds,” where he said that ordinary people should keep a 50/50 ratio of bonds and equities, with a dynamic balance each year. After some gains, I felt I could try a higher equity position, so I gradually adjusted to 60% equities and 40% bonds, increasing the proportion of equities over time.

Yang Tiannan: The 60/40 model is a very classic asset allocation model. But in real life, people’s risk preferences vary greatly, and most people can’t clearly describe an asset allocation ratio. They might hold a fixed income+ product, some bank wealth management products, and perhaps own a home, so they can’t clearly define the proportion of their family assets. Can Xiuhua help such listeners sort this out?

Zhai Xiuhua: If we look at the overall asset spectrum, the lowest risk is cash management products like money market funds, which currently account for a large part of household financial assets, with an annualized return of about 1%. Slightly riskier are pure debt products, which tend to have higher long-term yields. Next are fixed income+ products, which add a certain proportion of equities on top of bonds. During this process, fluctuations inevitably increase. For example, a low-volatility product with only 5% equities might have a maximum drawdown of about 3%, due to bond and small stock fluctuations. Over the long term, the equity portion can increase the product’s annualized return expectation by 0.5% to 1%. If higher returns are expected, more equity exposure is needed, naturally increasing volatility.

If we add 40% equities on top of a bond base, this product is called a偏债混合 (biased bond mix), and its volatility is relatively high, with maximum drawdowns possibly reaching over ten points. Moving further up, we have equity funds and stock funds, whose volatility is similar to broad market indices. Even excellent equity funds can experience 30%-40% drawdowns from market peaks to troughs. Investors in such products need to have this psychological expectation. But in the long run, their returns can outperform bonds, and the excess return is the risk premium for enduring volatility.

In fact, when we do asset allocation, we are essentially doing a framework-based calculation. For example, if I want my money to grow fivefold in 20 years, I might need an annualized return of about 8%. This expected return is not low, and achieving it requires a corresponding asset mix within the spectrum we just discussed, which may involve accepting some volatility during the process.

Yang Tiannan: Ms. Zhang, we know you have held an equity fund for over 10 years. Equity funds are quite volatile. Many people hold them long-term because they got stuck and sold out after breaking even. But you actually had gains most of the time. Why can you persist for so long?

Ms. Zhang: First, I don’t need this part of the money urgently, so I haven’t moved it much. Sometimes I get the urge to trade myself, but I only try with a small portion of my funds. Through repeated operations, I realize I can’t predict market ups and downs, so I prefer to leave it to professionals.

Yang Tiannan: I’ve talked to many overseas investment advisors, and I found it interesting that when they chat with you, they don’t immediately ask how much you want to earn or push a product right away. Instead, they first care about your family situation—like whether your children will study abroad, when you plan to retire, or whether you’ll consider buying a vacation home after retirement. Based on your family needs and life plans, they then help you plan your finances and investments. When it comes to asset allocation, understanding yourself is very important, as you mentioned.

Zhai Xiuhua: When investing, the time dimension of money is very important. For example, if an investor has 500k yuan in savings, they need to distinguish how much will be needed in one year, and how much can be left untouched for five to ten years. The goal of asset allocation is not just to earn money but to match the actual needs of my family. For instance, Ms. Zhang can hold a long-term, high-risk equity fund because she doesn’t need that money for a long time. That’s a good allocation idea—matching the investment horizon with your risk appetite. Also, you need to ask yourself: what kind of person are you? For example, if you lose 20k or 30k yuan on that 500k, does it make you uncomfortable? That determines your risk tolerance and your potential long-term return. As Yang mentioned, with the same 500k yuan, depending on age, cash flow stability, and family needs, the asset allocation direction can vary greatly. For example, a 40-year-old might have most of their major expenses behind them, and that 500k yuan might not be needed for the next 20 years, so they can plan for more equity investments. But a 25-year-old who is about to marry and have children might have potential large expenses, so a higher proportion of high-risk assets might not be suitable.

Mutual pursuit between retail investors and fund managers

Yang Tiannan: When financial managers introduce fixed income+ products, they often say “attack when possible, defend when necessary,” and that these products can add some yield on top of fixed income, which also gives an impression—like “fixed income+”—that the returns will be higher than pure fixed income, without much consideration of the fact that volatility can go both ways, up or down. Xiuhua, what methods can an ordinary investor use to understand a fund?

Zhai Xiuhua: From a fund manager’s perspective, we really want to find investors whose style matches ours. We hope the sales side can recommend suitable products to the right investors. But in reality, there’s often information asymmetry. For example, the first wave of fixed income+ products emerged during a bull market, making it hard for investors to fully understand these products at that time. After the market cycles of bull and bear, both investors and managers have evolved their understanding of these products. Internally, we also revisit the positioning of each fixed income+ product, and based on clear positioning, we seek to find investors who match.

Ms. Zhang: I remember ten years ago I often visited a website called Morningstar, which provided ratings for various funds, allowing investors to learn about different funds and fund managers, and to filter options proactively. This was quite different from later third-party sales platforms, which mostly highlight funds with recent high returns. But often, by that time, the fund’s style had already been pushed to an extreme, and investing then could involve significant downside risk.

Yang Tiannan: What Ms. Zhang said is very key—mutual understanding between investors and managers. I recall in 2020, I visited a fund manager who was very worried. He told me that he used to know his investors well, but after internet channels opened, his number of investors doubled or tripled. He didn’t know who they were, and they didn’t know him. This mismatch of expectations can be a major cause of investment losses. That’s why opportunities like today are so valuable—when fund managers and investors meet face-to-face offline, they can truly understand who is managing their money and who is managing theirs.

Multi-asset: The advanced path of asset allocation

Yang Tiannan: Ms. Zhang, I understand that besides A-shares and bonds, you are also interested in overseas assets and gold. How did you get involved with these diverse assets?

Ms. Zhang: I participate in some community learning groups and follow these investment targets on social media. During this period, everyone was talking about AI or gold, so I naturally paid attention and learned more.

Yang Tiannan: Xiuhua, what do you think about investors incorporating more diverse assets into their asset allocation? What role does this play in Chinese households’ portfolios?

Zhai Xiuhua: Overall, Chinese investors have a very low proportion of overseas assets, with only very forward-looking investors doing some asset allocation abroad. From a theoretical perspective, diversification can reduce portfolio volatility. For example, assets like gold are naturally inflation-resistant, and US bonds have low correlation with China’s bond market. US stocks have their own logic. But on the other hand, these assets require high professional skills. For instance, gold investors’ counterparties are central banks and professional investors worldwide, and exchange rate fluctuations also come into play. Ordinary investors still need tools and professional advice to manage these allocations.

Yang Tiannan: People are still very concerned about the current market outlook. From a medium- to long-term perspective, what is your view, and how can everyone better manage their asset allocation?

Zhai Xiuhua: Currently, the biggest macro issue is the low interest rate environment, which leads to low yields on all fixed income products, and this problem isn’t solvable in the short term—everyone has to accept it. Second, interest rates are the universal gravitational pull for asset pricing. When rates are low, other assets should naturally offer some valuation premium. That’s why we might be relatively optimistic about equities—at a 2% interest rate level, compared to 5%-6% ten years ago, the opportunity cost is different, and our valuation requirements for stocks are different. Also, from the perspective of listed companies’ financial statements, interest rates are part of their financial costs. So, given this low-interest-rate environment, I am relatively optimistic about the long-term return potential of equities. But since the market has already risen for two consecutive years, with some assets overvalued and others still at the bottom, whether it’s a value trap or an investment opportunity requires very professional judgment. I personally believe that in the current environment, I am optimistic about the long-term prospects of equities, but I also acknowledge that earning returns is becoming more challenging.