Your portfolio asset allocation

[ExpatJ]

I am looking for some advice about asset allocation- stocks v gold v bonds. Plus does anyone here rebalance their allocation systematically ?

I just read an interesting article which recommended 60/30/10. Stock bond gold. And he said if any one Asset class increases by more than 5% he sells or if one falls 5% he buys - this is in order to a) rebalance his portfolio and to

Ensure that he always buys lower and sells higher ( which is the key after all and something which many people fail in!). I thought it I quite a neat system to ensure buy low sell high??

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[SpokaneAl]

I believe in asset allocation and keep mine balanced primarily via additional investments and infrequent distributions. The specific asset allocation for each of us, of course depends. Other assets, income and it's sources, risk tolerance, age, long and short term goals etc all come into play in determining asset allocation.

This might be a good place to start - http://www.bogleheads.org/wiki/Asset_allocation

[SheungWan]

It might make some sense with substantial assets to allocate, but with smaller amounts you may get eaten up by trading costs, so easier to allocate to a mutual fund which replicates a diversified portfolio if that is what you want.

Edited January 19, 2014 by SheungWan

[SpokaneAl]

It might make some sense with substantial assets to allocate, but with smaller amounts you may get eaten up by trading costs, so easier to allocate to a mutual fund which replicates a diversified portfolio if that is what you want.

And I would suggest that fund or funds be no-load index funds.

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[Naam]

only a genius could develop the brilliant method "buy low sell high". i will heed that advice and act in future accordingly

[fletchsmile]

It might make some sense with substantial assets to allocate, but with smaller amounts you may get eaten up by trading costs, so easier to allocate to a mutual fund which replicates a diversified portfolio if that is what you want.

And I would suggest that fund or funds be no-load index funds.

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Rather a sweeping statement. Depends on the asset class, sector, market, index, fund etc. US equities maybe. But what's your view on say:

- commodity funds with negative roll yields that detract from performance?

- markets where replicating indices synthetically isn't always smooth?

- volatile markets that may be regularly subject to say political/economic shocks where the index leaves you sat in a falling market, where an active manager can easily switch into cash sometimes before you've even realised there is a problem.

Cheers

Fletch

Edited January 19, 2014 by fletchsmile

[fletchsmile]

To OP,

I don't rebalance allocations systematically, but do take it into consideration, as it does have merit in my view. I like to leave some room for judgement though so it's just a factor.

I think you also need to bear in mind that your allocations and objectives will/should change over time. eg when I first started investing at an early age I was much more weighted to equities (95%+ to be honest) given the long time horizon, high risk tolerance, in a wealth-creation stage etc. Being older now with commitments, more focus on wealth preservation than creation, the allocations have shifted to include more bonds, gold, cash etc. So for the 60/30/10 bear in mind you don't necessarily want to systematically balance to the same level.

Another variation you might be interested in is including cash with your bonds, gold and equities and putting 25% in each. If you google it some people like this approach and again it has some merit. For me that's more suitable for "wealth preservation" and "I've made it stage", than building up wealth. Then some people vary the 25/25/25/25 depending on where we are in the market, economic cycle or other factors...

Cheers

Fletch

Edited January 19, 2014 by fletchsmile

[SpokaneAl]

Those are all questions that you need to answer for yourself. For me, I keep it simple with no load mutual funds (predominately index funds) in a wide range of asset classes and I stay away from the stuff that you listed. It has worked over several decades for me.

Read, study, learn and analyze - nobody gives a rip about your money as much as you.

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Edited January 19, 2014 by SpokaneAl

[thrilled]

I do 80 10 10. 80 stocks 10 bonds and the rest cash. Stocks were strong last year.I'm hoping for another good year.Bonds are doing poorly.I always keep cash,ya never know

[DogNo1]

I think that your allocation to different investment vehicles should be predicated on your age and investment objectives. Due to my age, all of my investments are in income a producing securities. I make very little in capital gains. Most of my profits come from dividends from carefully selected income securities. Don't get lost in formulaic guides such "buy the dogs of the Dow". It would be great to buy low and sell high if anyone could do it reliably. I encourage due diligence. Read a lot of books on investing, see how their recommended strategies play out. You may be surprised at how many are unsuccessful. John Bogle is a good man to listen to. Many others in the investing industry are simply crooks, whether big-time or small time, their objective is to relieve you of your money. I can honestly say that I've never had an advisor whom I could trust!

[SpokaneAl]

It might make some sense with substantial assets to allocate, but with smaller amounts you may get eaten up by trading costs, so easier to allocate to a mutual fund which replicates a diversified portfolio if that is what you want.

And I would suggest that fund or funds be no-load index funds.

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Rather a sweeping statement. Depends on the asset class, sector, market, index, fund etc. US equities maybe. But what's your view on say:

- commodity funds with negative roll yields that detract from performance?

- markets where replicating indices synthetically isn't always smooth?

- volatile markets that may be regularly subject to say political/economic shocks where the index leaves you sat in a falling market, where an active manager can easily switch into cash sometimes before you've even realised there is a problem.

Cheers

Fletch

". . . Where an active manager can easily switch . . ." While they talk the good talk, I have yet to see an active manager that can accomplish this with any continuing, proven degree of success. And for this you are paying substantially more in fees and expenses. To me it ain't brain surgery. Create a mix that works for you, skip the trading and stick with it, don't get caught up in the short term noise, watch your costs, and keep the long term view - decades preferably. Then concentrate on your income producing skills and your life, spend less than you earn and keep packing away the difference. And don't forget to have an emergency fund and keep your short term goal money (anything you need in five years or less) out of the markets.

That is what has worked for me.

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[xylophone]

Quote DogNo1; "I think that your allocation to different investment vehicles should be predicated on your age and investment objectives".

Good point............And if you add to that, "your risk profile" (age playing an important part in this) then you have a basic of financial planning. When one reaches an age where there is no salary, then usually one goes into income producing investments with a low percentage in shares. One proviso here being that some shares pay good, steady dividends, so careful selection is needed.

It is almost the reverse of what, say a 20 year old would have as an asset allocation, and not many portfolio managers would include gold in an asset allocation.

[RandomSand]

If you'd done this over the last 3 years you'd be nearly totally in fixed income by now. Might be the best place to be, we'll see... but you'd have an unbalanced portfolio.

[xylophone]

If you'd done this over the last 3 years you'd be nearly totally in fixed income by now. Might be the best place to be, we'll see... but you'd have an unbalanced portfolio.

Depending upon age and risk profile of course, but a "balanced portfolio" for a 65 year old looks a lot different to that for say a 40 year old.

Again, attitude to risk can override what would seem to the "norm" for any portfolio!! I once had a 78 year old woman tell me that she wanted to invest a large amount in shares because she was quite comfortable with the risk, even though her portfolio was then terribly unbalanced from what would generally be seen as the norm.

[AyG]

I don't know how long I'm going to live, so I allocate my investments in a manner similar to a university endowment fund that is expected to run effectively for ever.

David F. Swensen (CIO for Yale) writes that one shouldn't hold conventional bonds for the simple reason that the upside is very limited. There may be a case to be made for inflation-linked bonds (as a hedge against inflation), for very short term bonds (providing liquidity) and emerging market bonds (for diversification - though the characteristics are more equity-like than bond-like). I almost completely eschew conventional bonds.

Gold has its fans, but it doesn't have any intrinsic value - it's only worth what someone will pay for it. For 20 years or so its value barely changed. Then its value soared, and now it's crashed from its peak by 40% or so. For me it's not a rational part of any sensible portfolio as an investment (though it may have value purely for its diversification effect - but I believe there are better diversifiers out there).

One important class missing from the 60:30:10 split is physical property (not property shares). It is weakly correlated with equities (correlation of 0.4-0.6 for US according to EPRA report) and so is a reasonable diversifier, and provides a steady, pretty reliable income stream as well as chance of capital appreciation.

Use of high level categories such as "60% stocks" is not particularly helpful. Large cap? Small cap? Value? Growth? US? Europe? Emerging Markets?

I'd also add that articles written in the US have a US-bias, recommending holding mostly US stocks. (And other countries writers have a similar bias.) One needs to reinterpret such articles for the needs of someone living (or planning on retiring) in another country. For me that mean having a substantial part of my portfolio in Asian equities, including an allocation to Thailand.

For what it's worth, my target asset allocations (somewhat simplified) look like this:

Major Market Equity 25% (split UK 10%, Europe 10%, North America 5%)

Asian Equity 30% (split 25% to the "Asian Tigers" and 5% to Thailand)

Emerging Markets Equity 10%

Emerging Markets Bond 5%

Index-linked Bonds 5%

Natural Resources 10% (a long-term thematic play)

Physical Property 10% (in the Asia-Pacific region)

Infrastructure 5%

For me this seems about right - though others will, I'm sure, disagree.

[MJP]

All of my assets are held by my ex-wife.

Like an annuity, only in reverse.

[SpokaneAl]

I don't know how long I'm going to live, so I allocate my investments in a manner similar to a university endowment fund that is expected to run effectively for ever.

David F. Swensen (CIO for Yale) writes that one shouldn't hold conventional bonds for the simple reason that the upside is very limited. There may be a case to be made for inflation-linked bonds (as a hedge against inflation), for very short term bonds (providing liquidity) and emerging market bonds (for diversification - though the characteristics are more equity-like than bond-like). I almost completely eschew conventional bonds.

Gold has its fans, but it doesn't have any intrinsic value - it's only worth what someone will pay for it. For 20 years or so its value barely changed. Then its value soared, and now it's crashed from its peak by 40% or so. For me it's not a rational part of any sensible portfolio as an investment (though it may have value purely for its diversification effect - but I believe there are better diversifiers out there).

One important class missing from the 60:30:10 split is physical property (not property shares). It is weakly correlated with equities (correlation of 0.4-0.6 for US according to EPRA report) and so is a reasonable diversifier, and provides a steady, pretty reliable income stream as well as chance of capital appreciation.

Use of high level categories such as "60% stocks" is not particularly helpful. Large cap? Small cap? Value? Growth? US? Europe? Emerging Markets?

I'd also add that articles written in the US have a US-bias, recommending holding mostly US stocks. (And other countries writers have a similar bias.) One needs to reinterpret such articles for the needs of someone living (or planning on retiring) in another country. For me that mean having a substantial part of my portfolio in Asian equities, including an allocation to Thailand.

For what it's worth, my target asset allocations (somewhat simplified) look like this:

Major Market Equity 25% (split UK 10%, Europe 10%, North America 5%)

Asian Equity 30% (split 25% to the "Asian Tigers" and 5% to Thailand)

Emerging Markets Equity 10%

Emerging Markets Bond 5%

Index-linked Bonds 5%

Natural Resources 10% (a long-term thematic play)

Physical Property 10% (in the Asia-Pacific region)

Infrastructure 5%

For me this seems about right - though others will, I'm sure, disagree.

I agree with you completely concerning gold - no growth, dividends or earnings, purely based on the greater fool theory.

While I had not considered it before, your comment concerning country centric investment recommendations got me thinking. If one was living in Thailand I wonder if an argument could be made that a portfolio holding a predominant piece in, for example, US stocks in the name of regional diversification might be reasonable - just a thought off the top of my head.

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Edited January 20, 2014 by SpokaneAl

[meand]

I don't like gold too much either.

I do think it is good to have a general number in mind. According to how you feel the market is doing, you can tweek your percentages. Now may be a good time to get more into the Thai stock market for example.

I have a most of my money in my owned real estate, which is conveniently enough where I live also I don't know if this is the smartest thing, but it is working for me so far. I am about 70% real estate, 25% or so stocks and a little gold. For whatever reason, lack of knowledge or whatever, I hold no bonds. I am fairly young though, I suppose if I lost every thing it would not be the end of the world, unless I lost my job too I have been increasing my holdings on stocks. Owning the real estate helps me put a bigger chunk into the stock market every month.

[SpokaneAl]

I don't like gold too much either.

I do think it is good to have a general number in mind. According to how you feel the market is doing, you can tweek your percentages. Now may be a good time to get more into the Thai stock market for example.

I have a most of my money in my owned real estate, which is conveniently enough where I live also I don't know if this is the smartest thing, but it is working for me so far. I am about 70% real estate, 25% or so stocks and a little gold. For whatever reason, lack of knowledge or whatever, I hold no bonds. I am fairly young though, I suppose if I lost every thing it would not be the end of the world, unless I lost my job too I have been increasing my holdings on stocks. Owning the real estate helps me put a bigger chunk into the stock market every month.

I tend to view my home as a use asset and not an investment.

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[AyG]

While I had not considered it before, your comment concerning country centric investment recommendations got me thinking. If one was living in Thailand I wonder if an argument could be made that a portfolio holding a predominant piece in, for example, US stocks in the name of regional diversification might be reasonable - just a thought off the top of my head.

There clearly is a diversifying effect of holding both US and Emerging Markets. At times of "risk on" Emerging Markets will typically outperform the US, and when "risk off" (as for example, the last 12 months) Emerging Markets will perform poorly compared with the US. The UK/Europe lies somewhere between the two extremes.

If one were purely looking for long term growth and to hell with the risk, then one should probably be all in Emerging Markets. Allocating between developed and emerging markets should reduce the volatility at the expense of lower expected returns. (From memory, the correlation between the US stock market and Emerging Markets is about 0.7). For me, a tilt is towards Asian and Emerging Markets, with proportionately less in the US/Europe seems right.

[meand]

I don't like gold too much either.

I do think it is good to have a general number in mind. According to how you feel the market is doing, you can tweek your percentages. Now may be a good time to get more into the Thai stock market for example.

I have a most of my money in my owned real estate, which is conveniently enough where I live also I don't know if this is the smartest thing, but it is working for me so far. I am about 70% real estate, 25% or so stocks and a little gold. For whatever reason, lack of knowledge or whatever, I hold no bonds. I am fairly young though, I suppose if I lost every thing it would not be the end of the world, unless I lost my job too I have been increasing my holdings on stocks. Owning the real estate helps me put a bigger chunk into the stock market every month.

Yeah, I'd have to agree. I was kind of stating simply where I have my money, as opposed to the thread topic, where I have my investments

In any case, I hope to grow the stock % in my portfolio in the coming years.

[Naam]

my asset allocation:

shares 0%, bonds 62%, cash 32%, physical gold 6%, portwine 19%.

[Naam]

If you'd done this over the last 3 years you'd be nearly totally in fixed income by now. Might be the best place to be, we'll see... but you'd have an unbalanced portfolio.

my portfolio is unbalanced since 37 years.

[xylophone]

I don't know how long I'm going to live, so I allocate my investments in a manner similar to a university endowment fund that is expected to run effectively for ever.

David F. Swensen (CIO for Yale) writes that one shouldn't hold conventional bonds for the simple reason that the upside is very limited. There may be a case to be made for inflation-linked bonds (as a hedge against inflation), for very short term bonds (providing liquidity) and emerging market bonds (for diversification - though the characteristics are more equity-like than bond-like). I almost completely eschew conventional bonds.

Gold has its fans, but it doesn't have any intrinsic value - it's only worth what someone will pay for it. For 20 years or so its value barely changed. Then its value soared, and now it's crashed from its peak by 40% or so. For me it's not a rational part of any sensible portfolio as an investment (though it may have value purely for its diversification effect - but I believe there are better diversifiers out there).

One important class missing from the 60:30:10 split is physical property (not property shares). It is weakly correlated with equities (correlation of 0.4-0.6 for US according to EPRA report) and so is a reasonable diversifier, and provides a steady, pretty reliable income stream as well as chance of capital appreciation.

Use of high level categories such as "60% stocks" is not particularly helpful. Large cap? Small cap? Value? Growth? US? Europe? Emerging Markets?

I'd also add that articles written in the US have a US-bias, recommending holding mostly US stocks. (And other countries writers have a similar bias.) One needs to reinterpret such articles for the needs of someone living (or planning on retiring) in another country. For me that mean having a substantial part of my portfolio in Asian equities, including an allocation to Thailand.

For what it's worth, my target asset allocations (somewhat simplified) look like this:

Major Market Equity 25% (split UK 10%, Europe 10%, North America 5%)

Asian Equity 30% (split 25% to the "Asian Tigers" and 5% to Thailand)

Emerging Markets Equity 10%

Emerging Markets Bond 5%

Index-linked Bonds 5%

Natural Resources 10% (a long-term thematic play)

Physical Property 10% (in the Asia-Pacific region)

Infrastructure 5%

For me this seems about right - though others will, I'm sure, disagree.

Well thought out, however little bit "aggressive" for old fogey like me who is a little risk averse!!

As for bonds (I also have shares and term deposits), I only hold corporate bonds, and double-A rated at that, and I am lucky living in the Antipodes, inasmuch as we weren't hit as heavily as the rest of the world as regards the GFC and the CDOs, so my choice of assets is a little easier, especially as one is currently paying me 7.75% pa, and what with short-term interest rates rising, new issues will be available in the next couple of years which should also get me above 6% pa (and paying very little tax due to living overseas).

Interestingly enough with the CDOs, my colleague and I went to a presentation by a company (from the USA) advocating including CDOs in the portfolio of managed funds we offered, however we declined due to the complex nature of the product, when even the presenter couldn't satisfactorily explain how they worked!.

Our range of funds were predominantly index trackers, with very low fees (obviously), and were allocated through an investment advisory process which covered the client's current status, goals, age, risk profile and investment timeframe.

Onto a separate, but related point, it always amazed me how many clients would be scrimping and saving in their retirement when relying solely upon their pension and what interest was generated from, for instance, a bank term deposit, when they had something like half a million dollars in the bank.

It would be perfectly feasible for them to live more comfortably by dipping into that capital sum from time to time, by doing the maths as to how long it would last when doing this. Obviously one has to take a bit of a guess as to the age to which one will live, however I see no point in eking out a living in one's retirement years, only to leave a lump sum in the bank for some relative to rip into, when they die.

Some folk however just want to leave their kin an inheritance, and that's entirely up to them, but they rarely think about the alternatives and living a better life whilst they can.

I wonder if this applies to a few folk here in Thailand?

I remember a lovely saying from an older Financial Planner when he said he lived by the adage that, "he wanted to plan it so that he could spend as much as he had on all of the good things in life, and on the day he died have just enough left in the bank to cover his funeral. However, even if there wasn't enough left in the bank for that, someone would always ensure he was put below ground", or words to that effect.

Always made me chuckle.

[Time Traveller]

my asset allocation:

shares 0%, bonds 62%, cash 32%, physical gold 6%, portwine 19%.

That's a very liquid portfolio

Edited January 20, 2014 by Time Traveller

[Naam]

my asset allocation:

shares 0%, bonds 62%, cash 32%, physical gold 6%, portwine 19%.

That's a very liquid portfolio

unfortunately the asset mentioned last shows always a loss

[Naam]

I tend to view my home as a use asset and not an investment.

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[SheungWan]

I tend to view my home as a use asset and not an investment.

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My home turned out to be the best asset I ever had when I sold it.

[ExpatJ]

Some interesting posts. So im thinking of the following- i have around 15-20 yrs till retirement.

Gold - 10%

Rental property - 30%

Thai stocks- 10%

AA or better US Corporate bonds- 10%

Dividends US stocks (auto reinvestment of dividends)- 15%

Small cap value US stocks- 5%

Other emerging market stocks - 5%

Cash -15%

If any one of these groups increases by more than @ 10% ill sell the profit and reinvest in an underperforming group- this will allow me to sell and take profits and buy lower price assets than i normally do (my biggest investment mistakes - like many others- is to a) get greedy and end up watching my gold/stocks prices increase alot and then fall back down again when i should have sold and taken a nice profit and giving up on a stock/gold etc after the price drops alot and selling it - taking the loss- in order to reinvest elsewhere.

Seems obvious buy low /sell high- but its the most common mistake made by average investors- doing it the other way around - my system aims to ensure i avoid this...lets see in a year how it has done.

Edited January 21, 2014 by ExpatJ

[AyG]

If you're planning on retiring to Thailand, does it really make sense to have so much of your investments in the US geared to the US economy? And what about exchange rate changes over the years? Asia's economies are rising, whilst America's is in long-term decline.

Since you have a long time to retirement you can afford to have almost all your investments in equities at the moment. Gold, bonds and cash are simply a drag on performance. You'll almost certainly not even be beating inflation with cash.

Are all the rental properties in a single town? If so, what happens if the major employer in that area goes bankrupt or leaves the area? Possibly no income and almost worthless property. That would be a very concentrated risk. Far better to invest in a diversified fund offering exposure to physical property.