Couple of questions on asset allocation

Mrs_Z

Good afternoon to all,

I’m in the middle of reading the much recommended Tim Hale’s Smarter Investing and I have a couple of questions regarding asset allocation (ie. % cash/equity/bonds/property).

First; property.

How do you deal with
1) Residential property – is this usually left out from the calculations as regardless of the value, you need to live somewhere (unless there were plans to downsize)?
2) BTL property – presumably you only take into account the equity in it rather than the market value?
3) Holiday property abroad – is it worth including this as although in paper, it could be worth X, in reality it could be very difficult to sell (so the value is somewhat irrelevant)?

P2P lending:

1) do you class this as ‘cash’?
2) in terms of risk, would you say they are more/less risky than bonds?

Interested in reading your thoughts,

tacpot12

Property

For portfolio management purposes, I would leave your home outside of the portfolio. You are not going to sell your home just to rebalance your home away from residential property.

Holiday properties should be included, but foreign residential property might be regarded as a different asset class to residential property in your home country, due to the currency risk. All assets can be difficult to sell so I wouldn't exclude holiday properties for this reason.

Cash

I would regard P2P lending as a form of cash. I regard it is riskier that most bonds - there is a definite risk of loosing substantial amount of capital.


Before following the investment advice in any book, I would recommend that you make sure you understand why the advice works, and when it might not.

dunstonh

How do you deal with
1) Residential property – is this usually left out from the calculations as regardless of the value, you need to live somewhere (unless there were plans to downsize)?
2) BTL property – presumably you only take into account the equity in it rather than the market value?
3) Holiday property abroad – is it worth including this as although in paper, it could be worth X, in reality it could be very difficult to sell (so the value is somewhat irrelevant)?

Basically, exclude property that is lifestyle related rather than investment related. ie. dont include 1 & 3.

P2P lending:

1) do you class this as ‘cash’?
2) in terms of risk, would you say they are more/less risky than bonds?

Most consumers understate the risks of P2P. The quality of the P2P you take part in can vary as well. However, somewhere on par with bonds as a broad guide (noting that bonds can appear across most profiles too)

Mrs_Z

Thank you both, it's clear now :T

TheTracker

I don't treat p2p as an asset class. It is a method of purchase, a wrapper.

Inside it you can have investments that look like 'notice account cash', corporate bonds, funds of corporate bonds, property, other sectors like aviation, socially responsible orgs, etc. Different p2p platforms target different investments/sectors, etc.

bigadaj

dunstonh wrote: »

Basically, exclude property that is lifestyle related rather than investment related. ie. dont include 1 & 3.



Most consumers understate the risks of P2P. The quality of the P2P you take part in can vary as well. However, somewhere on par with bonds as a broad guide (noting that bonds can appear across most profiles too)

Are you looking at and advising on p2p as an asset class as an adviser?

Just not sure about what may be included within your remit from a regulatory perspective.

bigfreddiel

dunstonh wrote: »

Basically, exclude property that is lifestyle related rather than investment related. ie. dont include 1 & 3.



Most consumers understate the risks of P2P. The quality of the P2P you take part in can vary as well. However, somewhere on par with bonds as a broad guide (noting that bonds can appear across most profiles too)

I like the 'lifestyle' way of categorising 1 and 3, never thought of things and their value that way, cheers fj

dunstonh

bigadaj wrote: »

Are you looking at and advising on p2p as an asset class as an adviser?

Just not sure about what may be included within your remit from a regulatory perspective.

It is within the remit of an IFA. I doubt any FAs have it within their remit though.

kidmugsy

After being persuaded by a thoughtful blog commenter, we count our house as equity-like: its "dividend" is the rent we would otherwise have to pay; its value in the future is unpredictable, but it may be largely what's going to pay for our stays in Care Homes should that prove necessary.

We count our pensions in payment as bond-like: we know their values at some point in the future (namely, nil at death), and the (real) income we get from them at regular intervals.

Both of these are in sterling and are illiquid. They are each far more valuable than our financial portfolio.

Our financial portfolio therefore has to supply all our liquidity, our planned irregular expenditure (car replacement, maintenance of the house ...), our cash emergency reserve, and our non-sterling investments.

For anyone who hasn't retired yet, and doesn't have a DB pension, this way of looking at things is probably unsuitable. It also leads to investment allocations that are not much like those advocated elsewhere.

TheTracker

kidmugsy wrote: »

For anyone who hasn't retired yet, and doesn't have a DB pension, this way of looking at things is probably unsuitable. It also leads to investment allocations that are not much like those advocated elsewhere.

This holistic consideration is applicable to those far from retirement, too. Some advocate inclusion of human capital in asset consideration. Salaries are dividend. Whether the capital is equity or bond like depends very much on your occupation and skills. A civil servant could count future earnings potential as bond like, a technology contractor more equity like, a steel worker more risky than a plumber.

I like the idea, and it aligns with my early-career advice to not contribute heavily to a pension but instead develop your human capital for better future earnings. However, a good part of the reason for asset allocation is maintaining a portfolio where you could suffer an x% fall, and future potential earnings are cold comfort when your current pension value falls 40%.

Ray_Singh-Blue

My way of thinking is to include in the asset mix everything that can be sold. So a house would be in there. You need a roof over your head, but it doesn't need to be the roof you live under now, and you don't need to own it.

DB pension I do not include in the pie chart. Rather I think in terms of £x (gross assets) + £y per year (DB pension)