Wednesday, March 05, 2008

Changing Portfolio Mix

The chart shows the composition of my Mom's portfolio over the last 5 years. The main trend has been a reduction in the allocation to cash. The portfolio she inherited from my father, who died in 2002, was very heavy in cash. It had between one and a half and two times as much in equities as the March 2003 position, but no alternative investments and little if anything allocated to bonds. The equities were in a separately managed account with a UK broker who wasn't exactly much good... By March 2003 we had about half the portfolio in an account with a well known investment bank, the rest mainly in cash and mainly in Sterling. Over time we shifted more to the investment bank, then changed banks and allocated part of the portfolio to a small independent broker who provides access to US based separately managed accounts. In late 2005 I prematurely reduced our equity allocation (with the pretext of rebalancing) and increased our bond allocation. Since then we have increased the equity allocation further through the independent broker.

Our next major change to the portfolio I think should be to reduce the bond allocation. I don't see bonds performing as well going forward as they have in the last 25 years or so. There is a limit to how low interest rates can go so that yields are now low and capital gains unlikely. The question is how to reallocate the money now in bonds. My Dad's approach was very conservative in his later years, which isn't surprising as he was 15 years older than my mother. But it is a mistake to allocate a portfolio based on your age alone when you are leaving it to family members who are much younger. My father was a much more aggressive investor when he was younger (and poorer). So it is probably also a mistake to allocate the portfolio based on my mother's age alone (Seventy-six). Rather we should think like a university endowment or similar fund.

On the other hand the 110 rule of thumb implies that a 76 year old should have 34% of their portfolio in stocks and we only have 26% actually even now. So we can certainly increase our allocation to stocks further without doing anything unusual. On the other hand, including our alternative investments in the stock category puts us at 46% in higher expected return assets.

How low should we go with the bonds? Given we have 17% in cash?


I started a new category today "Family Finance" to cover the finances of our extended family.

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