Asset Allocation

This is my current Asset Allocation


This is where I’m steadily moving to over the next 10-15 years.


Big change is a reduction in the amount of Direct Australian Shares that I self-manage to a higher allocation of passive assets. The risk profile of the Direct Share holdings will also be reduced from a high-risk active investing approach to a slothful low risk investing approach.

This post is in response to @Nodrog asking a question relating to my currency exposure.

Thought it worthwhile posting my whole asset allocation approach for clarity as asset allocation really is the big influencer in the scheme of things, much more important than the detail we spend most of the time talking about.

Now the challenge to anybody reading this post: I’ve shown you mine………............

 

A question I would like to ask if you are happy to answer is.

What percentage of portfolio income do you need for your living expenses. For eg it could be say 50% of portfolio income is sufficient for living expense.

The reason I ask this question is has decision for asset allocation in any way determined by the percentage of income generated from the portfolio. So for eg would the asset allocation weightage been any different if 100% of portfolio income was required for living expense compared to say only 50% of portfolio income.

Put it another way does the size of the portfolio give you flexibility in how you allocate asset to different asset classes and diversify?

Cheers,
Oracle.

 

Something I've wondered about is when people say a percentage of cash in their asset allocation, does that normally include their cash for everyday expenses and emergencies, or would it normally only include their "investment cash"?

I'm relatively new to investing. I have:
LICs (MLT, ARG, BKI): 56%
VAS: 27%
VGS: 17%

I don't have any particular allocation target in mind. The trouble with me is that my preferences (LICs vs ETFs and Australian vs international) can change very easily based on what I've read recently.

 

Current ex super portfolio ;

30% Australian Shares Index
30% Developed Markets Index
10% Emerging Markets Index
10% Global Infrastructure (Hedged)
10% Global Property
10% Australian Bonds

I also hold 4 direct stock positions but I dont consider this in long term asset allocation decisions.
Going forward I will also be increasing AUD Cash so will likely end up close to below ;

28.5% Australian Shares Index
28.5% Developed Markets Index
9.5% Emerging Markets Index
9.5% Global Infrastructure (Hedged)
9.5% Global Property
9.5% Australian Bonds
5.0% AUD Cash

So we settle with around 43% / 57% Australia / International exposure and 52.5% / 47.5% AUD / Foreign currency.

 

Hi @oracle, your thinking is absolutely spot on in my view.


My portfolio has to yield very little to meet my requirements. The size does give me great flexibility.

If I needed a higher yield to meet my requirements, sequence of risk considerations become a lot more important and I would be looking to have a more defensive assets allocation (high quality gov’t bonds and/or cash) to smooth the volatility.

My local/global split would probably stay pretty much the same regardless of size. I think much more in terms of total return than initial yield on this front.

Asset allocation is not a one size fits all. Definitely an area for thinking about for oneself and matching to individual circumstances and refining as those circumstances evolve. Not a field for copying what others do. Hopefully this thread will provoke some what people do and why they do it discussion so others can apply the thoughts to their own circumstances.

 

Hi @MarkW

The Australia vs International question can be broken down a bit into diversification (global helps you diversify away some Australian industry concentration) and currency exposure. Two really important asset allocation decisions.

Relative proportion of defensive assets vs risky assets is also an important question.

These asset allocation decisions are worth getting clear in your head early in your journey.

ETF vs LIC (Low fee, old school) is way down the order of importance – leave it for when you have nothing better to do than naval gaze and split hairs. Either will do initally as ways to implement different aspects of your asset allocation.

 

My thinking has changed a little from when I started and keeps edging towards a 50/50 split of Aus and international.

VGS mostly for international, thinking about adding an emerging or Asian flavour as well.

Aussie will be VAS and some LICs at a discount when available.

Plenty of holdings from before I thought about it all too much which will not be increased.

 

Ok I’ll show you mine:


Current Total Portfolio (super + personal names):

24% Aus Shares - Passive Index (VAS)
34% Aus Shares - Active low fee LICs (AFI, ARG, DUI, MLT, MIR)
...... DUI will become a dominant LIC overtime given its broader mandate
16% Developed Markets Index - (VGS / VGAD based on valuation)
4% Global active with Asian Tilt LIC - legacy holding (PMC)
22% Cash and Term Deposits

Expected Portfolio in roughly 5 - 10 year’s time:

28% Aus Shares - Passive Index (VAS)
30% Aus Shares - Active low fee LICs (AFI, ARG, DUI, MLT, MIR)
28% Developed Markets Index - (VGS / VGAD based on valuation)
...... VGS allocation expected to be much greater than VGAD
2% Global active with Asian Tilt LIC - legacy holding (PMC)
12% Cash and Term Deposits

Not MY ideal asset allocation but one that’s agreeable to both my WIFE and me.

International Unhedged developed equities (VGS ) allocation would increase at the expense of Australian Equities if Australia’s longer term prospects become severely diminished. Personally given our age I’m optimistic this is a lower probability possibility in our lifetime.

 

Thanks for your helpful comments @dunno.

 

@dunno the only fault I can find is that your eventual Asian allocation should be 7.5% rather than 7.4%. Any decimal number not ending in 0 or 5 is known to bring bad luck.

 

You are exactly right. Having to carve out 1% for cash has ruined all my round numbers....I knew cash was evil.

 

Do you intend to rebalance periodically once your target weightings are achieved, and if so are you prepared to sell holdings, with potential CGT implications, or rely only on inflows/savings and accept greater variance from targets for longer?

Ps great thread.

 

Personally, the latter. Rebalance from retained earnings and/or inflows without being too strict about things, keeping fairly wide rebalancing bands. I’ll be drawing up an investment policy document which will detail this stuff but I haven’t bothered as yet.

 

I agree - great thread! One thing that hasn't been mentioned though is the PPOR property as a proportion (try saying that fast!) of the asset allocation. Given its low correlation with share prices, income (either giving you rent or removing the need to pay it) and typically low volatility can it not be considered a substitute for bonds? I'm pondering it with my own asset allocation....

 

I disregard PPOR as part of our investment portfolio. Seen plenty of debate on this over the years but personally I choose not to include it as part of our investment portfolio.

 

Further to our portfolio in regard to local vs international, asset allocation and hedging etc being an enthusiastic investors I like to devise a perfect plan, asset allocation or whatever in the hope I’ve covered all bases.

Although my wife has little interest in our detailed investing she spent most of her career in enterprise risk management. This included being a partner in one of the big four here and overseas with clients including SAB Miller, Proctor & Gamble and Unilever. Subsequent to that the final part of her career was Head of Risk Management, General Insurance with a Top 20 insurer.

She puts up with my all too occasional ramblings about why our portfolio should be this way or that. She tries to be polite given I’m her husband albeit with glazed eyes but god forbid if I was an employee of hers. Thank Christ I have her. Because she’s a reality check against nerdism.

Without rambling on and on invest according to what your current needs are. As conditions change adjust accordingly. Trying to devise the perfect plan is futile. It doesn’t exist. You can only plan so far into the future. Insurance comes at a cost, deciding on a balance between cost vs benefit is never easy.

I genuinely respect and look forward to contributions from many extraordinary posters here. But one unsung hero I truely admire is @SatayKing. Like my wife he (no I’m not gay) provides a reality check against complexity, over-thinking, seeking perfection and being pragmatic about it all. Wisdom is a priceless commodity.

The end result is all that matters. There are countless ways to get there. Perfection is rarely one of them. The main thing is simply to save, invest in sensible assets, adjust to changing conditions and most importantly it should allow you to sleep well at night.

A lovely night out including a few refreshments. Hopefully this post makes sense.

PS: Reading over this it sounds like crap, it’s a shame my wife who could do a thousand % better job of explaining it has no interest in forums.

 

@dunno

I'd held STW and CBA for years so retained them in the portfolio

I had a simple STW/VTS/VEU/VGB asset allocation portfolio for a long time but changed in later years to VAS,VGS and VAF

<edit> I wanne be like @Nodrog retired with more coming in than I can spend

 

I guess it can be considered so if you are committed to downsize to something significantly cheaper at some point in the future. From what I’ve seen locally a lot of downsizers spend just as much on the new place however.

Salary / Wages can also be loosely considered as an inflation linked bond, to the extent of your remaining working life and allowing for some volatility

 

Looking at this post of mine from last night I really must learn not to Post Under the Influence. What a ramble. Not sure what I was talking about but such is life.

Oh well at least I have a new acronym PUI.

Back to business, c’mon reader’s show us your Asset allocation / Portfolios to keep the discussion going.

 

PUI/PWP. No difference. DUI better though and I thought I had told others to back off from it as it's mine.

I gave no thought at all to asset allocation initially. Only looked for dividend income once I got over the "excitement" of the share market. I'm late to the game and it is only in recent times I've done much about it.

In them thare olden days, wasn't much anything international apart from unlisted funds. PMC was my poison but really I was thinking of the dividend then as it was pretty good.

Presently the structure outside of the SMSF is:

Australia (67%)

AFI, ARG, DUI (mixture but included in Oz group), MLT, MIR, PIC (meh but not large,) STW (held since listing,) WHF.

International (33%)

ALI, PMC, VGS

Superannuation is really the same holdings but presently 78%/22%. Although I am not particularly fussed about operating the SMSF - it's just something that's there now - I'll more than likely increase the international allocation. More of an exercise to do rather than with much concern over the intent.

And I have to refute any suggestion I have wisdom. I certainly don't. The only ability I do have is one of watching others in a remote manner. Seeing the enthusiasm and salivation at "Wow, I'm gonna be rich" and sometime later when all goes quite thinking "Hmm, that didn't work, did it?" Educational in an odd way. Of course, occasionally it worked for them and then I'd go "Bugger, why didn't I do that?" Also educational.