Portfolio Changes and Asset Allocation

The margin call and other actions has restructured the portfolio quite a bit:



Now we're only only borrowing 23 cents for every dollar of net worth and reduced the net worth allocated to both stocks and bonds. While the view above looks at how many dollars of net worth is allocated to each investment class, we can also look at the actual exposures to each asset class as shares of total assets. These total assets include net worth, borrowed funds, exposure provided by leverage funds, CFDs etc:



Also, for the first time I've broken down the stocks asset class into Australian large and small cap stocks and US and rest of the world stocks. For each dollar of net worth we are exposed to $1.78 of assets, which is still a high degree of leverage in my opinion. Exposure to bonds is now very low and exposure to Australian stocks very high. I don't really know how much should be allocated to each asset class. Posting this breakdown is a step towards thinking about that in the long-run. There are tax advantages to Australians owning dividend paying Australian stocks, which have to be weighed against the benefits of diversification. If we also include funds that I may inherit the picture looks a lot more balanced:



The combined portfolio is much heavier in bonds and cash, has only 45% of assets in stocks and only 41% of those stocks are Australian. Exposure to private equity and commodities is still small but it's looking a bit more like an "endowment portfolio".

How Does the American Economic Association Invest?

The American Economic Association (the World's top academic economics society) has an $18 million dollar potfolio. They're currently invested 85% in stocks and 15% in bonds. 55% of the total is in US equities and 30% in foreign equities. In April 2007 they reduced the bond percentage from 35% to 15%, which mirrors my more recent moves in my own and my Mom's account. But I made this move after the 2007-8 stock market correction not before it. Still their moves out of high-yield corporate bonds and the total bond market into investment grade bonds were well timed. As Mankiw notes it's surprising they don't have any real estate and I'd add any of the alternative assets such as private equity and hedge funds that the best performing university endowments have. Well, I guess they are a bit too strong believers in efficient markets to do anything like that...

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?

P.S.

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

Choosing a Superannuation Asset Allocation

I checked out the "product disclosure statement" a.k.a. prospectus for Snork Maiden's superannuation fund a.k.a retirement account. One interesting point is that under the "superannuation choice legislation" you can opt out of the employer sponsored fund for a private provider but then instead of contributing 15.4% of pay (North Americans with employer "matches" will be envious of this number) the employer may only pay the legally required minimum of 9%. The employee can contribute between 2% and 10%. I am supposing the default is 2% - I will find out when I get to see a pay stub. We will stick with 2% for the moment. 17.4% is a very high rate of contribution as it is. Though when I worked in Australia before our required total employer-employee contribution was 21%!

On asset allocation I am thinking to allocate 90% to the default Trustee Choice and 10% to the "Sustainable Option". The sustainable option is managed by AMP and invests in Australian Shares selected according to various ethical and environmental considerations, both positive and negative. The Trustee Choice is allocated:

Australian Shares: 30%
International Shares(hedged) 22%
Long/Short Equities: 5%
Property: 15%
Cash: 2%
Bonds/Fixed Interest: 16%
Market Neutral Strategies: 10%

This is fairly typical of current endowment or pension fund allocations - 52% allocated to equities, and about 15% to each of hedge funds, bonds, and real estate. For those concerned about management fees they are 0.77% on the Trustee Choice plus an average 0.05% in performance fees and 0.51% for the Sustainable Option. No, there are no index fund options, but I expect a chunk of the Australian and International Share exposures are index tracking.

There is an "Aggressive Mix" that cuts out the bonds, slightly reduces the hedge funds, and increases straight equity exposure to 70%, but I prefer to go for more diversification.