Asset Allocation

darkidoe

Hi All

I have just started my passive investment journey this year and am learning new things as I go along. I have read Monevator articles on asset allocations and model portfolios and understand the role of diversification to reduce risk and capture as much of the market return as possible. I understand the balance between bonds and stocks should reflect how long you expect to be in the market for and for me I am taking a longer term view. I am more interested to hear what are some of the different portfolio asset allocations for the equity side of things people invest in and reasons behind it?

In my opinion, the most diversified portfolio would be one that emulates the world stock market which would according to Monevator be:

North America (US & Canada) 52%

UK 8%

Pacific inc Japan 13%
• Europe 17%
• Emerging Markets 10%

How have you guys been designing your portfolios and why?

colsten

I use Vanguard Lifestrategy, with one added commercial REIT.

But my requirements will most likely be very different from yours as I have exited working life already, and I have a good final salary pension. Other considerations are dependents, mortgage, available assets, and risk profile etc.

My recommendation would be that you don't try to create your portfolio based on portfolios other people have. Especially if those other people are total strangers on the internet.

dunstonh

I understand the balance between bonds and stocks should reflect how long you expect to be in the market for and for me I am taking a longer term view.

Dont forget property.

ChesterDog

...and as well as property, consider your wider holdings (which you may also consider part of your 'portfolio'): peer2peer, savings of various types, gold, other sources of income.

I am not suggesting you need all of those things, but do at least consider them and how they might add to your diversification.

On the other hand, as Colsten said above, there are also much simpler ways to achieve the same idea.

So it's perhaps most important to remember that there's more than one way to skin a cat (we dogs always enjoy using that expression) and ultimately - having considered them all - you need to find one that not only achieves the appropriate aims but is a good fit for you personally.

Playing_with_Fire_2

In addition to your allocation I have:
Increased exposure to emerging markets (I think they'll grow faster)
Increased exposure to small companies
Some Middle East exposure

I don't buy REITs as I have enough exposure to property from my house.

Are you planning to buy these individually? Unless you are planning some market timing a total world market index fund can be easier and cheaper (check that it covers emerging markets or buy that separately).

redux

I don't have a grand design, however things seem to have done ok recently. The other day I read an article reviewing investment trusts that have done quite well for the year (though not a simple list of all the top ones) and was rather surprised to see that I own 6 of the 11 mentioned.

This isn't clever reallocation in the last couple of years though, more like some passive 15 year old flukes, and one pension fund was mainly in trusts managed by a company that appears well this year. A Japanese based trust that had a sizeable doldrums spell but I refused to sell has turned into one of the year's best performers, up nearly 50%

Someone who had strategically decided to go overweight in Japan or in smaller companies in most areas would have done quite a bit better than the diversifiers and index followers, whereas someone who did the same in China or in resources might have been a bit burned.

So wonder about having some opinions based on a bit more than just an even geographical spread.

https://www.morningstar.co.uk/uk/news/145529/smaller-companies-outperform-big-stocks-in-2015.aspx

This won't always be the case though.

I read the opinion of one fund manager who said he's starting to trickle into resources companies, but he wonders if he's still a bit early.

That slightly reminds me of a friend who at the time of other people being berserk about throwing money at tech companies was buying oil company shares, saying oil can never be this cheap again (it was cheaper then than it is now).

N1AK

darkidoe wrote: »

In my opinion, the most diversified portfolio would be one that emulates the world stock market which would according to Monevator be:

North America (US & Canada) 52%

UK 8%

Pacific inc Japan 13%
• Europe 17%
• Emerging Markets 10%

How have you guys been designing your portfolios and why?

I thought that was a good starting point for the very reason you suggest. My only 'tweak' was to hold 15% UK by droping 5% off US and 2% off Europe. It probably isn't needed, however my logic was that as I'm most likely to live and spend within the UK having a stronger link to local conditions is beneficial.

Rollinghome

Playing_with_Fire wrote: »

Increased exposure to emerging markets (I think they'll grow faster).

You need to be a little careful thinking along those lines, whether when assessing markets or individual shares.

Yes, everyone expects emerging markets to grow faster but therein lies the problem: that expectation is already in the price. There's only an enhanced return when an investment does better than expected.

Woodford illustrated this with his big investments in tobacco, even though this was considered a dying industry 20+ years ago. The expectations were overly pessimistic and while the FTSE is below where it was at the start of this millennium, the price of companies like BAT has risen 600% over the same period (some would say regrettably) and Woodford becomes the super-star manager.

So there's more to it than just expectations of faster growth.

webnibbler

colsten wrote: »

I use Vanguard Lifestrategy, with one added commercial REIT.

Interesting to see a similar set up to mine (confirmation bias? )

Vanguard LifeStrategy 80% - 70%
Smaller companies - 10%
REIT - 10%
EM - 5%
Commodities - 5%

Over four years smaller companies and REITs have done well, but commodities is punishing right now.

I'm a little unsure that second guessing a single-fund like VLS is a particularly good idea in the long run. It may prove that it's simply better to trust Vanguard with my asset allocation and just hold a VLS on it's own.

dunstonh

webnibbler wrote: »

Interesting to see a similar set up to mine (confirmation bias? )

Vanguard LifeStrategy 80% - 70%
Smaller companies - 10%
REIT - 10%
EM - 5%
Commodities - 5%

Over four years smaller companies and REITs have done well, but commodities is punishing right now.

I'm a little unsure that second guessing a single-fund like VLS is a particularly good idea in the long run. It may prove that it's simply better to trust Vanguard with my asset allocation and just hold a VLS on it's own.

Your level is very high risk. REITS, EM and Commodities are all at the extreme high risk end of the scale when it comes to UT/OEIC funds. You could be in for one hell of a rollercoaster ride.

I have been advising for over 20 years and not had one person with a risk profile that high.

Linton

darkidoe wrote: »

Hi All

I have just started my passive investment journey this year and am learning new things as I go along........

In my opinion, the most diversified portfolio would be one that emulates the world stock market which would according to Monevator be:

• North America (US & Canada) 52%

• UK 8%

• Pacific inc Japan 13%
• Europe 17%
• Emerging Markets 10%

How have you guys been designing your portfolios and why?

I diagree that simply following the allocation of a true grobal tracker provides the maximum diversification. The problem is that diversification is multifactored. You do have geography, but that is arguably less important than business sector or company size. A pure global tracker will predominantly invest in the larger multinationals operating in the same global economy. This will blunt geographic diversification - one global bank or oil company will perform similarly to another independently of where its HQ happens to be or where its shares are quoted.. Large multinationals tend to congregate in certain industry sectors - finance in particular. Having 52% US leads to a relatively high investment in Apple/Microsoft/Google/Facebook etc - too high in my view.

My long term growth portfolio is:

Geographic
North America - 23%
UK - 17%
Asia/Pacific inc Japan & Australia - 28%
W,. Europe - 24%
Emerging Europe/Africa/ME/Latin America - 8%

I intend to increase North America a bit at the expense of Asia/Pac as soon as Asia/Pac recovers..

Sector
Finance - 16%
Healthcare - 15%
Consumer cyclical - 13%
Technology - 13%
Industrials - 12%
Basic Materials - 9%
Consumer Defensive 9%

with other smaller sectors. I am fairly happy with this spread as it is lower in financials than a global tracker with higher health and technology.

Company size

Large - 48%
Medium - 27%
Small - 23%

It is here where my allocation is rather different to a global tracker:
- smaller companies have shown better performance
- smaller companies are more representative of their geographic location