Asset Allocation

Thanks @oracle good reminder of the amazing diversity and strength of the sp500

 

I've been naughty...I broke my investing rules on Friday last week and bought IJH (USA midcaps) instead of VGS. The reasons I did it:
1. There is a long track record of US mid caps outperforming large caps over the long term.
2. The ratio between the mid cap to large cap price to earnings ratios is the lowest it's been since the dot com boom.
3. The earnings yield was 5.65%. For large caps it is 4.67%.
4. Whilst very strongly correlated with large caps, it goes through extended periods where it out or under performs. Therefore it does add some diversification because of its more USA domestic market focus. At worst it's a cheap way of getting a more balanced USA exposure akin to equal weighting.
5. Fees are small.
6. Compared to small caps there's less rubbish.
7. It was 20% below it's all time high. Completely arbitrary figure I know, but I went to a shop on the weekend prior specifically because it had a 20% off sale....

But really the reason I did it was because I wanted it. It was my reward for not caving during the big downturn earlier this year, and continuing to buy through it. It was a decent amount of money but still less than 10% of the portfolio, so in the grand scheme no big deal. None of these are great reasons, but it adds a little bit of spice without adding too much risk. I'll balance it out with some IVE next time I'm due to buy non-australian equities.

I never thought my midlife crisis would be buying a "sexy" share index....I always pictured a 2 door sports car.

 

Do you mean IVV?

Cheers,
Oracle.

 

Not a misprint - I was referring to IVE as a world ex-usa balance akin to 50/50 USA and world. This gets the combination in the ballpark of VGS. Funny how VGS fees are almost identical to a combo of IVE and IJH fees. It made me think hard about using an allocation whereby I continuously rotate my DCA through in order VAS, IVV, VAS, IVE, VAS, IJH, VAS, VAE to try and get better diversification than VGS for a similar price and keep an overall 50/50 australia/international and for international 50/50 USA/world allocation.

Honestly though I think i'll just go back to normal programming with VGS/VAS alternation. Simple and probably identical long run returns. I feel like I'm trying to outsmart the market...

I'm open to being talked into/out of that method though!

 

Took me ages to just settle on SAA's for our portfolios. Now I have reached the point of acceptance and moved on...it will never be perfect. It's diversified enough, cheap enough, with a comfortable level of unhedged exposure and enough exposure to risk assets. Lock and load. Have had a couple of unlisted opportunities come across my desk recently and after digging in decided to pass. My risk appetite seems to be declining now that I am at "enough".

 

Drifting in that direction myself. Spend next to no time anymore on investing forums / have given up reading much about investing and now pursuing other interests has allowed me to see things more clearly. My risk tolerance is not as high as I though. Hence a little more weighting to the risk free component of the portfolio. Still hate Bonds though.

 

I thought I was there myself, but then had the opportunity to take a redundancy with a big payout and realised if I took it I may never have to work again if the investment gods smiled on me. That made me go back down the rabbit holes of effecient frontiers etc. etc. Still came back to the conclusion - nothing is perfect and more diversification beyond a point is complexity for the sake of it.

 

Don't worry that interest will come back once market hits new highs or should I say dividends new peak

You can never stay away from the markets for too long. Once an equity investor always an equity investor

Cheers,
Oracle.

 

Oh I don't know. It depends.

 

Dangerous situation that one....”if I could just find a way to eek out another 2% pa over the long run, based on past market performance I’m home and hosed” is a common theme, but you’ve got the self awareness to understand that.

 

Thanks for the kind words, it's a a very dangerous situation indeed - and makes you understand the difference between the accumulation phase and the beginning of the drawdown phase. Staring at the cliff of early retirement for me it was less about getting an extra X% and more about reducing the standard deviation / drawdown impact hence the interest in efficient frontiers, moving average strategies, currency hedging, market cap vs. equal weighting etc. When you find portfoliovisualizer too restrictive and start making your own programs to simulate and backtest that's when you realise you may have gone too far!

But none of that predicts the future. It might echo as they say but it won't repeat. I know what I want (50% PPOR equity + cash in offset, 50% Australian + international shares), the amount of leverage I'm comfortable with (no more than 50% of net wealth, against the PPOR with no margin loans), and how I want the shares to be (low cost indexes, 50% Aussie large caps with the rest as globally and size diversified as possible in markets I trust to support businesses). Choosing the specific index funds to achieve the portfolio balance is really just tinkering around the edges and reading the tea leaves hoping to predict the future.

 

The upside is 2%. The total risk weighted return is negative.

 

Howard Marks investment philosophy resonates with me. Managing risks over trying to beat the markets.

 

Time for a 2019/20 update. Its interesting to look back and see the evolution over time.

This is the wide view allocation picture with current weightings and where I think I am heading. What has stayed consistent is the high equity allocation but there has been tweaking (maybe too much) over time at the next level down.


March kindly gave us with high equity allocations a thorough prostate kind of examination with a finger straight up the date to test comfort levels. The first real examination since the GFC in my view.

Some of my direct holdings did a bit worse than average, the US$ denominated holdings cushioned a bit. Overall, the portfolio basically moved in lockstep with the XAO. The yellow line is my total portfolio value (direct+passive+cash) compared agains the XAO red line.



37.1% fall in a touch over a month. Maybe **** scared is a little too strong to describe the emotions but certainly discomforted at the speed of capital evaporation. Pleasing result though is I basically stuck my plan – only tinker was to buy broad based ETF’s a couple of times when plan called for buying direct shares, In my defense it simply speeds the planned transition to passive and the money still got invested. I lurched to the safety of diversification but didn’t run from equities. I also used the period to harvest some losses to offset some capital gains from take overs/off market buy backs earlier in the FY.

Below is relative strength comparison (rebased to 100) between my total portfolio value (yellow) which includes deductions for living allowance against the all ordinaries accumulation index (red) for the full financial year. Ideally my directs would lower volatility in draw down and match in good periods but they tend to work the opposite currently, I still have a way to go in de-risking the direct portfolio as well as transitioning more funds to index tracking.



Overall, still happy with an all equity allocation after the March examination. Pleased to have settled on passive being via very boring cheap broad-based ETF’s and feeling invigorated indulging my true passion, managing the active direct portfolio which is now logically boxed in my mind as part of the bigger long-term picture.

And that is my year in review.

 

Great post as usual @dunno

What is your sell down strategy for the direct shares or are you just buying ETFs from this point to achieve the 2030 target allocation?

Why would your plan require purchase of direct shares given 2030 targets? Does that have something to do with the volatility of the current market?

 

There is always something creating turnover in the direct share portfolio, even if that is just my stupidness when I forget I’m a sloth. So far I’ve always had enough liquidity at hand when passive ETF’s need to be purchased to maintain plan. There tends to be turnover in the active portfolio beyond what is needed for passive purchases which gets re-invested into new active positions.

Basically direct is slowly churning and unless something stellar occurs should stay around similar levels in real $ value terms over next decade but reduce as % of total portfolio whilst it provides the liquidity to funnel overall portfolio growth towards the passive side and increase that as % of total portfolio.

Life managing an active portfolio tends to throw up lumpiness’s and surprises making a mockery of my perfectly smoothed plan for transition, but the plan serves as a mud map for getting to desired allocation by desired date. I dunno much but at least I can know where I want to go.

 

@dunno can I ask if you do take an active approach when allocating new funds to passive investments. By that I mean let's say you have $50K to invest towards your passive portfolio.

How would you go about selecting which passive bucket it goes into?

1) 100% into Australian Shares (VAS)
2) 100% into Developed Global (VGS)
3) 100% into Asia (VAE)
4) 100% into Global small cap (IJH)
5) Equal amounts in each?
6) Use some valuation matric (Market with lowest p/e, p/b etc?)
7) Round robin
8) Other

(Assume all passive buckets are below their target allocation)

Cheers,
Oracle.

 

My portfolio management is as follows:

I know what % of each passive ETF I should hold. That % is slowly increasing each day according to my plan to get me where I want to get.

As soon as an ETF is 12.5K below target I buy 25K. If market movement requires more than 25K. I keep buying at 25K a day until back on plan.

I don’t sell ETF’s to bring them back down to target, if they get a 'relative' run on – the planned ramp in allocation brings them back in line over time.

More than one ETF may trigger on the same day, I will buy multiple ETF’s but only one 25k lot of each per day as above.

VGAD and VGS don't have separate allocations, the decision on which I buy is a value judgement.

Active is the source of liquidity. There is no portfolio management rules to keep active at designated allocation. But I try not to carry to much surplus cash. Management rules on passive and cash keep active portfolio around desired allocation levels by default.

At the moment, because of the weighting of active, how it performs has the biggest impact on when passive need to be acquired. A natural valuation re-balancing is going on.

 

I have been mostly buying VDHG once a month for the last 12 months (except for a couple of spur index purchases in March) and simplicity was something I looked back on fondly.

Saying that I feel long term for me It has too much AUS exposure considering taking into account realestate which I have in AUS

My target will be to do a fairly simple modification of VDHG by reducing AUS exposure and looking at

VAS 20%
VAF 10%
VGE 10%
VGS/VGAD 60%

Good enough is a term I have been reading and I think that it applies to much of my life including my investing.

I have another portfolio that is selected products that include Asian exposure and Real estate trusts and lending facility and venture capital - long term fun

Good enough has kept me sane during CV19 not having to worry about individual shares and when should I sell or what are good opportunities - passive investment has been simple. Do I regret missing out on APT etc (full disclosure I purchased 20K at $14 and quickly dropped to $7 and got out at $15 with the view of not losing capital) - absolutely - but then I have no time to understand individual stocks. I am sure for every good luck story of APT I could add 5 hard luck stories

 

Sounds like a sensible approach - home country bias is an unmitigated risk in many portfolios. Have you considered reducing your direct RE allocation, which raises an extreme form of concentration risk?

To achieve your allocation you could avoid selling your VDHG to avoid CGT (if you have made a gain) and brokerage by just buying VGS/VGAD/VGE in the right proportions.

Final consideration is that the massive growth in the NASDAQ recently has put valuations of VGS at extreme levels.

I am still buying into VGS (my VGAD allocation is too high after gorging on it whilst the AUD/USD was down), VAS, FGG, FGX and PMC (value hedge) to achieve a 50/50 split (ASX/NON-ASX) but I am building a cash warchest based on my view of the current climate. I am looking for opportunities to sell down all direct shares (purchased prior to enlightenment) but their performance has been underwhelming and just proves that I am not a good stock picker. In super I rebalanced to VDHG allocations.