22 Dec 2010, 3:41pm
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  • asset allocation review part 2 and passive investment

    Lookinag at RIT’s carefully honed asset allocation, and pondering some of the comments on my post on why passive investing isn’t for me, I figured I might as well consider my own asset allocation. One of the parts I struggle with in the concept of passive investment is indeed the very act of choosing an asset allocation. In this post, TA/Monevator offer up nine different approaches.

    They’re all good, I assume, but as soon as you’ve chosen one of the nine you are no longer a passive investor. You are projecting your own hopes and fears for the future upon the empty screen of your ISA; you are choosing and making an opinion. Okay, it’s better than following share tips in the Torygraph – you at least choose a consistent direction for your course, rather than selecting a new direction every day. But you have chosen a direction.

    I’m opinionated enough to be prepared to declare my asset allocation is a function of my hopes, fears and expectations, my imperfect comprehension of the economy as a whole, of how I view my imperfect state of knowledge, and what I consider the downside risks to be.

    ISA asset allocation

    This only shows my ISA asset allocation – I hold more than my ISA in pension AVCs but I don’t have the sophistication to be able to factor them in. So how does my asset allocation reflect my views?

    Well, I am distrustful of the UK government, which I believe will debase the currency, shafting savers and hastening in serious amounts of inflation. So the gold and silver holdings (these are ETFs) should be no great surprise. They let me think about things without having to worry about the likes of Mervyn King silently stealing the shirt from my back devaluing the £. Devaluation was bad when I first came across it as a child when Harold Wilson did it in 1967 and no things aren’t different now, it’s still bad. I hadn’t intended to be so overweight in gold and silver, but they both appreciated seriously over the period I’ve been holding them. Or should I say the £ has gone down the toilet while they stayed the same?

    The fixed interest and the dividend targeted holdings (investment trusts focusing largely on UK FTSE 100/250 constituents) are a logical consequence of my need for income in the space between two years from now and five years from now, after which the income will compensate me for drawing my pension early.

    The emerging markets (=IBZL in my case) is part of the zeitgeist and my expectation that countries with a young workforce and oil reserves will have a better future than the bombed-out and indebted West. Next year I will add to that. I don’t do China – I don’t understand it and don’t trust it, but I will do India, a bit of Australia for their natural resources, possibly Canada for resources, and more of the same UK based IT wise.

    I’ll probably give gold and silver a rest unless the Euro or the $ go belly-up, the former for daft attempts to synchronise Greek wastrels with doughty Germans without a Central Bank of Europe and a Central Tax Office of Europe, the latter for the mind-blowing whirlwind that will follow the loss of reserve currency status if the Chinese and the oil producers get their way. I don’t actually want such a high weighting on that, so I will dilute it by focusing on other classes with next year’s ISA allowance.

    What’s wrong with my asset allocation, well, no exposure to other emerging markets. In an ISA you can only do so much in a year otherwise you end up with a zillion fragmented holdings, so I will take some of that on next year. No bonds – I don’t understand bonds, I don’t like them, and my pension to be  provides much of the function bonds would in a retirement portfolio so I can afford to indulge my prejudices and ignore this asset class. I may consider commercial property via REITs though it’s another asset class that I don’t understand so I may go with Warren Buffett on that one too – don’t invest in what you don’t understand…

    Considering my overall net worth (updated 23 Dec because I got the original chart wrong re gold)

    net worth asset allocation

    the picture is more balanced, though it is overweighted in cash for someone who spends time moaning about profligate government inflation stoking. Howeer, most of it is in a cash ISA and some of the rest is in NS&I index-linked certificates. Some of this is simply the standard personal finance emergency fund at work, but I target much more than the three months running costs standard recommendation. I will run, not walk, to the dooors of NS&I if they offer more RPI linked savings certificates in future.

    This doesn’t reflect the value of my house or the nominal value of any of my non-financial investments, because then ‘other’ would eat up most of the clock and compress the categories into a wedge and make it hard to read.

    So there it is – an unashamedly opinionated and un-passive investment asset allocation. In the end money is only crystallised power, and I can’t relate to an investment approach that tries to be unemotional, it doesn’t work for me. If I want to project force, then I must couple my values and beliefs to it. That doesn’t mean I have to chop and change on a daily basis – though my views to the future change over time, they don’t swing that dramatically day to day.

    Obviously I must accept the imperfect nature of knowledge, and my own awareness and limited skill. It is why I invest in the stock market even though I believe there will be crash mk2 in the years to come, which could wipe me out totally in financial terms. That is why I invest as if the glass is half full, and at the same time as if it is half empty. It’s not just asset classes where you need diversity – it is also in world-views.

    Although passive investing doesn’t sing to me, there is one behaviour that goes along with that which I have adopted. It is the Warren Buffett doctrine – buy and then hold. You have to screen for a reasonable price if you do that – the old drip-feeding idea also doesn’t really cut it for me. I want to buy cheap, and then hold, which means I have to sit and simply accumulate cash if I can’t find a suitable opportunity. However, the stock market of the last few years happens to suit my buying phase, particularly where I am chasing income.

    

    Re: Commercial property, now has to be a reasonable time in my view to start building a small holding given your need for income.

    Besides the obvious (LAND and BLND) you could look at DJAN, a smaller outfit run by very conservative orthodox Jews!

    The dividend record is superb, and the shares are marked at a huge discount to assets (though don’t expect it to close any time soon).

    Big risk I think (besides more housing wobbles – they have some residential flats too) is management changes, as the current directors are getting on.

    At least they presumably won’t blow the loot on wine, women and song. 😉

    (p.s. Disclosure: I hold!)

    I think I have a similar approach in that it is flexible in terms of allocations and to some extent strategies. I recognise that my approach is guided by emotions and hunches, but I think this is superior to mechanical systems which assume that the world fluctuates in only predictable ways.

    I think you are right to be wary of China since, in addition to the usual EM volatility, it has a dysfunctional and secretive polity which could blow up.

    I’ve missed the boat on gold and silver, but had I not, I’d be reducing through 2011.

    @Monevator – yes, I’m actively trying to get an understanding of it. It is a difficult asset class to get a handle on. Ordinarily I would look at BLND and think to myself, PE 4, Yield nearly 5%, what’s not to like, yes please, gimme now. And yet somewhere I smell a rat. Obviously comm property will take a hit in 2011 as consumers get cut down like trees, but even so. I liked DJAN’s property portfolio – flats in Cadogan Square aren’t going to suffer the usual slings and arrows of the residential market 😉 I need to study this more, property is just one of those things I have no feel for…

    The obvious question from that PE is why do people hate commercial property so much, it certainly matches the doctrine of buying cheap and as such it will get serious consideration for some space I have left for this year, particualrly as the other ITs I’m interested in have so rudely gone up before I could save enough to buy more at a good yield 🙂

    @SG I agree, perhaps mechanical systems may appeal more for folks who will be drip-feeding over many decades, I could see that working. But it just doesn’t light my fire, I want to be at the controls of my own craft, I accept the risk of pitching it in the ground. Plus, let’s face it, mu world-view is not compatible with assuming a steady-state economy for 30 years. I’ll be dead chuffed if I’m wrong, as you so elegantly put on your last post, that’s a mistake I can afford to make

    I think commercial property is a good place to be with a medium term income view, as just mentioned.

    Don’t believe the market always has it right – it was valuing Land Securities at £20 at the start of 2007! The shares were less than a fiver in contrast by mid-2009.

    It’s an unloved sector IMHO, and nobody is rushing into it because it’s seen as a late cyclical.

    I also like it because inflation erodes the real value of its debt and offers the potential of higher rents. Set against that is the impact of interest rate rises, of course.

    Only a 5-10% allocation max for me, mind. Better to buy it now before it’s all the rage in 2015 again. 😉

     

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