The asset allocation (AA) part of the portfolio has four components: an ETF based sub-portfolio, the two 401(k)’s for me and my wife, and another ETF and mutual fund based account that’s used to supplement the other three to fulfill the overall allocation goals. The first three accounts were meant to be stand alone AA plans, and will be used to illustrate AA in practice in future posts. I believe that beginner investors and those who cannot devote a lot of time to markets should stick with a suitable AA strategy. For me, this is the retirement money, pure and simple.
My overall target allocations are 30% domestic equities (split equally between large and small value, and large and small blend), 30% international equities (about 4:1 developed to emerging markets), 10% precious metals/energy/basic commodities, and 30% bonds. The 70% equities allocation is in line with the old rule of thumb “100 – age as the percentage of stocks”, even though the rule is generally regarded as conservative nowadays. Of course, in view of the concentration risks in my actively managed positions, anything less will be imprudent.
There is a recent trend among financial advisors to assign a small allocation to precious metals/energy/basic commodities. Whether they are chasing performance or actually share my bullish macro view in these sectors I have no way of knowing. At the end of this post, I list several books that hopefully will convince the readers that these sectors are in secular bull markets and their inclusion will boost long term returns.
Domestic and international equities are weighted equally in my plan, whereas the majority of other AA plans place a greater emphasis on domestic equities, usually by a factor of 2-4. In addition, I don’t have any allocation to REITs at all. Both choices were based on the likelihood that the bursting of the
It should be obvious by now that my asset allocation plan was never divorced from my macroeconomic views, just as I track the overall allocation to manage risk in my actively managed accounts. Rather than trying to reconcile Efficient Market Theory with my conviction in many of the secular trends, I follow both paths. Some might say I took the easy way out by being 50% right rather than 100% wrong, I say this is my middle way of investing.
Going back now to the task at hand. The current allocation is shown in the table and chart below. Note “company stock 2” is the stock my wife receives for her 401(k) matching. It is counted towards large
I will go into the ETF account and the two 401(k) accounts in more detail in the future. A post on “asset allocation basics” is also in the works.
Recommended readingsML http://investmiddleway.blogspot.com/