Ideal asset allocation

Herbalus

Audaxer wrote: »

I'd interested to know how a DIY investor like me finds such an allocation model to follow to ensure that my single sector income portfolio is structured properly?

I am under the impression that having some sort of external input into your asset allocation (as the nature of this particular allocation model implies, as it changes according to the economic outlook and cycle), would move you from the DIY sector into the advised sector!

After all, it is the professionals and their asset allocation tinkering that would give the tips on what particular allocation is wise at each particular point.

bowlhead99

Audaxer wrote: »

I'd interested to know how a DIY investor like me finds such an allocation model to follow to ensure that my single sector income portfolio is structured properly?

Not sure I follow the rationale for wanting to have a 'single sector' income portfolio? If your portfolio of funds is all focussed on one single sector, are you looking for a model of how to 'properly' focus on that one single sector? Or you mean you want to throw away what you have and instead get a diversified portfolio across asset classes and industry/ geographic sectors with a focus on income and a level of volatility (of capital value and level of natural income) that you can handle.

Regardless of choice of words, what a DIY investor does after reading books on portfolio theory and asset allocation is 'does it himself' by researching all his options and trying to figure out what is available, what he needs and how different options may complement or correlate with each other to produce a particular range of results based on historic data and current indicators. If you know the volatility range of different asset classes and fund areas and how they have historically interacted over time, you can consider potential outcomes of combining them together using a spreadsheet or database.

Some people would buy data rather than try to create it themselves, as a shortcut. But paying for data or deploying serious resources to create it is the sort of thing that professionals do, and it's the kind of thing that has serious economies of scale. If you apply the model to loads and loads of wealth management or personal finance advisory or fund management clients, the time/cost gets down to a fraction of a percent of the assets under management. If it's just for you, not so efficient. So DIYing people may try to pick something out of a book or magazine or blog, or what they see on the front page as a 'sample portfolio' promoted by their DIY platform, or make it up as they go along, or make a halfassed attempt to copy a professional fund with a rolling delay, or give in and buy a multi asset fund with a target volatility range that's professionally constructed, or give in further and seek advice

Personally I do a lot of playing with homemade 'what if' spreadsheets and free data from places like morningstar / trustnet etc, reports and articles in industry publications (I work in financial services), what I can see in the allocations of actual managers or providers of models targeting certain results, how did X sector perform relative to Y sector over period A and B and what was sector Z doing at the time, and so on. Then, I write down the names of funds I heard about on discussion forums or self indulgent advertorials from fund managers, throw them in a hat and pick them out again while refreshing a random number generator on a website for the percentages.

sixpence.

Do we count our homes as assets? Rich Dad Poor Dad dude says don't.

bostonerimus

Audaxer wrote: »

I'd interested to know how a DIY investor like me finds such an allocation model to follow to ensure that my single sector income portfolio is structured properly?

You might reduce your risk as you approach retirement or you might look at P/E ratios or the yield of the 10 year T-bill and change your stock and bond allocations.....if interest rates are on the way up maybe you want to avoid long term bonds etc etc. there are enough variables to keep lots of people fully employed for a very long time. The complexity of the problem and the uncertainty of the variables pushed me towards broad index trackers a long time ago and I'm sticking in that space through retirement. I do what a physicist does when faced with a complex problem; simplify and get the low order terms correct.....the higher order stuff can take care of itself.

OldMusicGuy

sixpence. wrote: »

Do we count our homes as assets? Rich Dad Poor Dad dude says don't.

I do, for reasons explained in post #20.

dunstonh

sixpence. wrote: »

Do we count our homes as assets? Rich Dad Poor Dad dude says don't.

And I dont, for reasons explained in post #17

This all comes back to personal circumstances. No hard and fast rules.

Audaxer

bowlhead99 wrote: »

Not sure I follow the rationale for wanting to have a 'single sector' income portfolio? If your portfolio of funds is all focussed on one single sector, are you looking for a model of how to 'properly' focus on that one single sector? Or you mean you want to throw away what you have and instead get a diversified portfolio across asset classes and industry/ geographic sectors with a focus on income and a level of volatility (of capital value and level of natural income) that you can handle.

Regardless of choice of words, what a DIY investor does after reading books on portfolio theory and asset allocation is 'does it himself' by researching all his options and trying to figure out what is available, what he needs and how different options may complement or correlate with each other to produce a particular range of results based on historic data and current indicators. If you know the volatility range of different asset classes and fund areas and how they have historically interacted over time, you can consider potential outcomes of combining them together using a spreadsheet or database.

Some people would buy data rather than try to create it themselves, as a shortcut. But paying for data or deploying serious resources to create it is the sort of thing that professionals do, and it's the kind of thing that has serious economies of scale. If you apply the model to loads and loads of wealth management or personal finance advisory or fund management clients, the time/cost gets down to a fraction of a percent of the assets under management. If it's just for you, not so efficient. So DIYing people may try to pick something out of a book or magazine or blog, or what they see on the front page as a 'sample portfolio' promoted by their DIY platform, or make it up as they go along, or make a halfassed attempt to copy a professional fund with a rolling delay, or give in and buy a multi asset fund with a target volatility range that's professionally constructed, or give in further and seek advice

Personally I do a lot of playing with homemade 'what if' spreadsheets and free data from places like morningstar / trustnet etc, reports and articles in industry publications (I work in financial services), what I can see in the allocations of actual managers or providers of models targeting certain results, how did X sector perform relative to Y sector over period A and B and what was sector Z doing at the time, and so on. Then, I write down the names of funds I heard about on discussion forums or self indulgent advertorials from fund managers, throw them in a hat and pick them out again while refreshing a random number generator on a website for the percentages.

Sorry bowlhead, I meant that my income portfolio consists of funds in different single sectors, mainly UK equity income, global equity income, Asian equity income, and some strategic bond funds. It yields around 4% and I thought I researched it pretty well. However when dunstonh mentioned about the need for a properly structured portfolio and the need to change things depending where we are in the economic cycle, it makes me think maybe mine isn't structured that well. I will monitor and rebalance when necessary, but I was planning to stick with the funds I have chosen unless they perform really badly, rather than try and change things depending where we are in the cycle. Is that wrong?

I have more currently invested in VLS than in my income portfolio, but further lump sum investments are likely to go to my income portfolio, so just keen to learn as much as I can so I do get it structured right.

bostonerimus

Audaxer wrote: »

Sorry bowlhead, I meant that my income portfolio consists of funds in different single sectors, mainly UK equity income, global equity income, Asian equity income, and some strategic bond funds. It yields around 4% and I thought I researched it pretty well. However when dunstonh mentioned about the need for a properly structured portfolio and the need to change things depending where we are in the economic cycle, it makes me think maybe mine isn't structured that well. I will monitor and rebalance when necessary, but I was planning to stick with the funds I have chosen unless they perform really badly, rather than try and change things depending where we are in the cycle. Is that wrong?

I have more currently invested in VLS than in my income portfolio, but further lump sum investments are likely to go to my income portfolio, so just keen to learn as much as I can so I do get it structured right.

Ah the siren song of improved performance. It sounds like you've made a good fist of this yourself. Have the courage that your own numerology and prognostications are as good as the next group of quants, models and people that purvey them. If you want to see one of the "best" of that bunch google James Simons.........

ams25

Interesting topic which I (maybe sadly) always enjoy reading about. Would be good to read more posting here their allocations and rationale. As many have said, its very personal so context is important. But nevertheless there is much to learn from reading about what others do and why, so sharing is helpful.

My context: I'm 53, FI/stopped working/retired/stay at home dad and need to live off savings until DB pension kicks in at 60, which will cover c.45% of expenses with balance from savings/investments. Full SP at 67 will (may) give additional comfort. Kids still primary school age so teenage/uni costs etc all to come.:eek: Wife is younger and want to leave decent provision (she has limited pension cover) and a legacy for kids. I exclude the family home from AA although envisage downsizing in c.15-20 years to potentially help kids and provide for long term care if needed. We are not excessive spenders and have sufficient funds not to need to chase for high returns.

My risk profile has changed since I stopped working (I was nearly all in equities) as I need to be able to weather a prolonged bear market and recognize that I [STRIKE]probably [/STRIKE]would not react well to seeing 40 or 50% of my wealth disappear. That said the more I study the market, safe withdrawal rates etc the higher % loss I think I could deal with. 20-25% feels about right now

Currently, my target AA is 55:35:10 (equities/fixed income/cash). I like to have a decent amount of cash, say 2 years expenses, even though i know it may be a drag on returns. I sleep better.

the 55% in equities is globally diversified mix of passive and active. historically mostly active but trending towards passive. I am a little underweight in equities right now.

the 35% is currently split 19% bonds, 8% Absolute Return funds, 5% REITs and 5% P2P. cash is a bit overweight. (what to do with it? plus some home improvements pending). I know the ABS funds get a bad rap but have mostly done their job so far.

As I get get closer to my DB pension I envisage a rising equity allocation, given the DB is effectively a material fixed income allocation.

I understand I could take more risk, but feel I don't need to (and shouldn't) at this point.

Audaxer

ams25 wrote: »

Currently, my target AA is 55:35:10 (equities/fixed income/cash). I like to have a decent amount of cash, say 2 years expenses, even though i know it may be a drag on returns. I sleep better.

I wouldn't say you are overweight in cash. I think in your position I'd have a bigger percentage in cash.

the 35% is currently split 19% bonds, 8% Absolute Return funds, 5% REITs and 5% P2P. cash is a bit overweight. (what to do with it? plus some home improvements pending). I know the ABS funds get a bad rap but have mostly done their job so far.

I'm not sure about Absolute Return funds, but as they will include some equity, would that not push your equity above 55%?

As I get get closer to my DB pension I envisage a rising equity allocation, given the DB is effectively a material fixed income allocation.

I understand I could take more risk, but feel I don't need to (and shouldn't) at this point.

I agree that you don't need to take more risk. You certainly have a higher risk tolerance than me. As your DB pension will only cover 45% of your expenses, I think I'd have more cash and less in equities as I approached retirement.