Asset allocation

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Topic Author
Prospero
Posts: 36
Joined: Thu Mar 08, 2018 5:28 am

Asset allocation

Post by Prospero »

I'm a UK citizen investing using the Vanguard ISA (tax free savings account)

My portfolio is:
Equity
  • FTSE all world 20%
  • Small Cap 20%
  • Value (active) 20%
Bonds
UK government bonds 20%
UK inflation linked bonds 20%

My rationale is:
  • Highly diversified (developed world)
    Low cost funds (probably not by Boglehead standards)
    Tracking the index
    Simplicity of only 5 funds
    Range of asset types (large, small, value stocks, bonds)
I would really appreciate some feedback. Have I tilted too far? Are value and small worth chasing?
minimalistmarc
Posts: 1051
Joined: Fri Jul 24, 2015 4:38 pm

Re: Asset allocation

Post by minimalistmarc »

Prospero wrote: Sun Dec 23, 2018 6:34 am I'm a UK citizen investing using the Vanguard ISA (tax free savings account)

My portfolio is:
Equity
  • FTSE all world 20%
  • Small Cap 20%
  • Value (active) 20%
Bonds
UK government bonds 20%
UK inflation linked bonds 20%

My rationale is:
  • Highly diversified (developed world)
    Low cost funds (probably not by Boglehead standards)
    Tracking the index
    Simplicity of only 5 funds
    Range of asset types (large, small, value stocks, bonds)
I would really appreciate some feedback. Have I tilted too far? Are value and small worth chasing?
I’m U.K. as well. I don’t bother tilting. I’m 100% equities all world.

That being said, your AA is perfectly fine
Topic Author
Prospero
Posts: 36
Joined: Thu Mar 08, 2018 5:28 am

Re: Asset allocation

Post by Prospero »

The reason I've tilted so much is because I think, rightly or wrongly, that the All world index will be predominantly large growth companies so I have tried to equal it out with the same allocation for small cap and value companies.
3funder
Posts: 1449
Joined: Sun Oct 15, 2017 9:35 pm

Re: Asset allocation

Post by 3funder »

It's fine, given your healthy dose of bonds.
Topic Author
Prospero
Posts: 36
Joined: Thu Mar 08, 2018 5:28 am

Re: Asset allocation

Post by Prospero »

My healthy dose of bonds was inspired by this article by Peter Bernstein:
https://web.archive.org/web/20061214061 ... in6040.pdf
magneto
Posts: 1031
Joined: Sun Dec 19, 2010 10:57 am
Location: On Chesil Beach

Re: Asset allocation

Post by magneto »

UK Gov't Bonds (Gilts) are considered by some fully priced since demand seems to have outstripped supply, due to such factors as institutional obligations to match their forward liabilities.
The retail investor is under no such obligation and may look elsewhere for defensives, or use just plain old fashioned Cash.
Reducing Bond duration to seek relative stability of principal in a rising interest rate environment; unfortunately inflicts sub-inflation yields with resultant ongoing capital loss in real terms (as might Cash of course).

Note : US Bonds (deliberately currency unhedged) seem more reasonably priced and do form part of our portfolio as 'dry powder' for future international Stock purchases.

Good Luck
Fellow UK Investor.
'There is a tide in the affairs of men ...', Brutus (Market Timer)
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Asset allocation

Post by dbr »

Prospero wrote: Sun Dec 23, 2018 8:56 am The reason I've tilted so much is because I think, rightly or wrongly, that the All world index will be predominantly large growth companies so I have tried to equal it out with the same allocation for small cap and value companies.
The economy is predominately large (not necessarily growth) companies.* Tilting to small and value is called factor investing, which you can research. Generally larger tilts to small and value require a person to be patient for a long time without getting upset over the materilization or lack of same of a benefit. I personally have never concerned myself about it and find neither need nor desire to tilt. Others are adamant tilters.

*Technically many stratifications of the market are defined so that the capital allocations in the market to value, growth, and blend come out equal, hence by definition the "market" is not tilted to growth. The conventional definitions of small, medium, and large are different and result in large cap stocks holding the largest share and small cap the least. But this is by convention. For more detail on the issue the original work of Fama and French would be informative.
andrew99999
Posts: 733
Joined: Fri Jul 13, 2018 8:14 pm

Re: Asset allocation

Post by andrew99999 »

magneto wrote: Sun Dec 23, 2018 11:20 am UK Gov't Bonds (Gilts) are considered by some fully priced since demand seems to have outstripped supply, due to such factors as institutional obligations to match their forward liabilities.
The retail investor is under no such obligation and may look elsewhere for defensives, or use just plain old fashioned Cash.
Reducing Bond duration to seek relative stability of principal in a rising interest rate environment; unfortunately inflicts sub-inflation yields with resultant ongoing capital loss in real terms (as might Cash of course).

Note : US Bonds (deliberately currency unhedged) seem more reasonably priced and do form part of our portfolio as 'dry powder' for future international Stock purchases.

Good Luck
Fellow UK Investor.
I've never understood this dry powder idea.
As I understand it, basically you're waiting for the market to drop before investing. I recall a couple of threads where people both took everything out around 2014/15, and when they wrote their threads not long ago, they missed out on 40% gain so far not including dividends, so around 50%. One finally gave up realising they may never get back in and one was determined to continue waiting. It is entirely possible the price never gets back down to those levels.
I am curious what is the point of your dry powder when the stock market is so unpredictable like this?
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Asset allocation

Post by dbr »

magneto wrote: Sun Dec 23, 2018 11:20 am
I've never understood this dry powder idea.
As I understand it, basically you're waiting for the market to drop before investing. I recall a couple of threads where people both took everything out around 2014/15, and when they wrote their threads not long ago, they missed out on 40% gain so far not including dividends, so around 50%. One finally gave up realising they may never get back in and one was determined to continue waiting. It is entirely possible the price never gets back down to those levels.
I am curious what is the point of your dry powder when the stock market is so unpredictable like this?
The expression may be a corruption of the advice to soldiers bearing muskets to "keep your powder dry." That maxim makes obvious sense. The dry powder idea applied to investing is not actually good advice and if it is imagined to appeal to a well know virtuous maxim, it is nonsense.
magneto
Posts: 1031
Joined: Sun Dec 19, 2010 10:57 am
Location: On Chesil Beach

Re: Asset allocation

Post by magneto »

andrew99999 wrote: Sun Dec 23, 2018 9:56 pm
magneto wrote: Sun Dec 23, 2018 11:20 am UK Gov't Bonds (Gilts) are considered by some fully priced since demand seems to have outstripped supply, due to such factors as institutional obligations to match their forward liabilities.
The retail investor is under no such obligation and may look elsewhere for defensives, or use just plain old fashioned Cash.
Reducing Bond duration to seek relative stability of principal in a rising interest rate environment; unfortunately inflicts sub-inflation yields with resultant ongoing capital loss in real terms (as might Cash of course).

Note : US Bonds (deliberately currency unhedged) seem more reasonably priced and do form part of our portfolio as 'dry powder' for future international Stock purchases.

Good Luck
Fellow UK Investor.
I've never understood this dry powder idea.
As I understand it, basically you're waiting for the market to drop before investing. I recall a couple of threads where people both took everything out around 2014/15, and when they wrote their threads not long ago, they missed out on 40% gain so far not including dividends, so around 50%. One finally gave up realising they may never get back in and one was determined to continue waiting. It is entirely possible the price never gets back down to those levels.
I am curious what is the point of your dry powder when the stock market is so unpredictable like this?
To oversimplify; a carefully constructed liquid Well Balanced Portfolio will essentially divide in to two groups :-
+ Risk/Growth (Stocks)
+ Defensives (Bonds/Alts/Cash), the 'dry powder' ('Fixed Income' for some)
When Stocks are surging selling of Stocks can take place using proceeds to top up the 'dry powder'
When Stocks are falling buying of Stocks can take place using (for ammunition) some of the 'dry powder'.
Maybe the term 'dry powder' confuses and better to just think 'defensives'?

You will obviously not muddle with 'market timing' or momentum investing, when selling will take place on falling markets and the converse. That way lies dithering, whipsawing and mayhem.
That is quite the reverse of what a Constant Ratio or Value Investor (Variable Ratio) will be doing.
As for the all in or all out method mentioned; utter despair. :x
'There is a tide in the affairs of men ...', Brutus (Market Timer)
andrew99999
Posts: 733
Joined: Fri Jul 13, 2018 8:14 pm

Re: Asset allocation

Post by andrew99999 »

magneto wrote: Mon Dec 24, 2018 4:34 am To oversimplify; a carefully constructed liquid Well Balanced Portfolio will essentially divide in to two groups :-
+ Risk/Growth (Stocks)
+ Defensives (Bonds/Alts/Cash), the 'dry powder' ('Fixed Income' for some)
When Stocks are surging selling of Stocks can take place using proceeds to top up the 'dry powder'
When Stocks are falling buying of Stocks can take place using (for ammunition) some of the 'dry powder'.
Maybe the term 'dry powder' confuses and better to just think 'defensives'?

You will obviously not muddle with 'market timing' or momentum investing, when selling will take place on falling markets and the converse. That way lies dithering, whipsawing and mayhem.
That is quite the reverse of what a Constant Ratio or Value Investor (Variable Ratio) will be doing.
As for the all in or all out method mentioned; utter despair. :x
Does this mean, you have
- a minimum amount of fixed income (eg 5 years worth)
- an asset allocation (eg 60/40)

Then you start with the min amount of fixed interest and rest in equities.
As equities increase you let increase until your AA at which time you start rebalancing.
Then in a bear market you consider the amount between the min amount and the current fixed income to be "dry powder" ?

If I understand that (and I might not), it sounds like a typical AA but with a minimum fixed income amount and you just happen to call anything between the min and your current bonds "dry powder"

If not using a constant ratio like this, how do you decide when to move move some "excess" out of equities and into fixed income without it being market timing?
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stemikger
Posts: 4950
Joined: Thu Apr 08, 2010 5:02 am

Re: Asset allocation

Post by stemikger »

I think it is fine. 60/40 is the sweet spot for many. Mine too!! Oh and it has Jack Bogle's blessing also!!
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
magneto
Posts: 1031
Joined: Sun Dec 19, 2010 10:57 am
Location: On Chesil Beach

Re: Asset allocation

Post by magneto »

If still looking for a way forward (like many of us), and open to diverse views, then the following UK forum might be of interest.

https://moneyforums.citywire.co.uk/
'There is a tide in the affairs of men ...', Brutus (Market Timer)
Topic Author
Prospero
Posts: 36
Joined: Thu Mar 08, 2018 5:28 am

Re: Asset allocation

Post by Prospero »

stemikger wrote: Mon Dec 24, 2018 8:21 am I think it is fine. 60/40 is the sweet spot for many. Mine too!! Oh and it has Jack Bogle's blessing also!!
My overall asset allocation may have the Great Bogle's blessing but the 40% on factors certainly does not.

In fact the reason why I wrote the opening post was because I had just read chapter 16 of The Little Book of Common Sense Investing .
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