Mighty Investor’s Personal Asset Allocation for 2018

My Asset Allocation In 2018

I don't take a pure cookie cutter approach to asset allocation.  I worked overseas as an American diplomat for years studying the economies of the countries where I lived.

Because I analyzed economies full-time, I don't approach asset allocation exactly as most portfolio managers.  My portfolio is idiosyncratic and reflects my understanding of global demographic, economic, and political trends.  

Here's how I'm approaching asset allocation in 2018--and the reasons why.

60% Stocks

40% Cash or Real Estate

The above mix represents my risk tolerance and desire for some cash flow in the short-term.  I don't own bonds presently because I'd rather hold cash during a rising interest rate cycle.  At some point, I will buy short-term investment grade corporate bonds to act as a stabilizer for the portfolio.  But not now during a rising rate cycle.

Asset Allocation - Breakdown Of Equities (60 percent of overall portfolio)

80% U.S. Equities

The bulk of my assets are in U.S. equities.  Why?  A bunch of reasons.

  • I live in the United States and spend in dollars.  I like assets that are denominated in dollars so that I don't have to worry about exchange rate risk.

  • I think U.S. equities over the long term have better prospects than other developed markets in Europe and Japan.  This is because the demographics in Europe and Japan look much worse than the United States and because much of Europe (though not some northern countries) is dealing with major debt issues.  Also, the public in many of these debt-laden countries shows no political appetite to try to tackle head on the debt challenges.

  • Europe and Japan in recent years have proven highly correlated with U.S. markets.  So I'm not getting much diversification benefit by investing there.

In terms of breakdown among small, medium, and large capitalization stocks, I have an emphasis on small-caps stocks (25% of U.S. stocks are small-cap) because, over long timeframes, small-cap stocks have slightly outperformed large. 

I also have a tilt toward dominant technology firms.  The portfolio is essentially tracking the U.S. market in bulk with a tilt towards small cap and big tech.

About 85% of the U.S. equities component is in ETFs and index mutual funds, 15% in specific technology shares.

20% Emerging Markets

I own a single emerging market ETF.  I own emerging markets for the following reasons.

  • Unlike Europe and Japan, emerging markets enjoy a favorable demographic profile. 

  • Also unlike Europe and Japan, emerging markets (post-financial crisis) generally carry lower debt loads and manage their finances more responsibly than many developed economies.  This is a real flip from the past and should give anyone pause when they think through risk/reward calculations.  Yep, emerging markets are often better managed from fiscal and monetary policy than developed markets.

  • Many emerging markets are starting from a lower overall level of GDP/per capita.  They are now entering a phase in which a wealthier consumer class is emerging (more middle-class consumers).  Like the favorable demographics mentioned above, this serves as a tailwind for emerging market companies.

I have seriously considered owning a frontier markets ETF, but have held off for several reasons so far.  These reasons include the following:

  • Frontier market ETFs have the unhappy dynamic of having the winning countries graduate from "frontier status" to "emerging market" status and the losing countries dropping from "emerging market status" to "frontier status."  So there is a certain "winners graduate from" and "losers join the index" dynamic at play.  Also, unlike emerging market economies, many frontier markets do have massive debt challenges.

This point alone gives me pause, but there is an even more important reason why I don't own frontier markets.

  • There are no solid frontier ETFs on the market.  None.  It's kind of crazy.  Each has some strange tilt--like being 80 percent focused on Latin America, or 60 percent concentrated on the Middle East.  I don't want to make those geographic bets on frontier markets.  If there were a solid frontier ETF, I might put some capital to work there.  But the first point above about frontier markets does also give me pause.  Yes, I could buy an actively managed frontier fund, but the fees are often ridiculous (2 percent or more), and I don't think it is worth it. 

I want to add one additional point that guides my thinking about international investing.  I try to avoid countries whose policies are moving heavily towards statist or authoritarian politics and policies.  I picked up this perspective when reading a book by the legendary investor John Templeton, who loved buying international stocks but avoided countries trending hard left. 

A perfect example in the present-day context would be Venezuela.  Of course, the opposite is also true.  If there were ever a glimmer that a country like Venezuela might be getting ready to abandon its authoritarian politics and policies, that would be the place to invest.  (Sadly, not the case presently.) 

Asset Allocation - Breakdown Of Cash And Real Estate (40 percent of overall portfolio)

First, I want to state that I don't own any real estate as an investment at this point.  I wish I already did, but for one reason or another, it is only in 2018 that I am going deep and developing an understanding of real estate as an investment class. 

So a large chunk of my assets (40 percent) is basically sitting in cash.  I raised this cash in anticipation of buying real estate, but haven't pulled the trigger.  Frankly, I feel I have wrong-footed myself a bit having this much cash, but I didn't want to put the money in bonds while we go through this upcycle in interest rates (which has proven correct). 

I am furiously researching real estate markets throughout the United States with the goal of getting most of this capital deployed by the end of 2018--with 5 percent remaining in cash as an emergency/dry powder fund. 

Ideally, the real estate that I purchase would cover my basic living expenses from year to year and function as the income-producing element of my portfolio (rather than bonds). 

If I don't eventually buy real estate, I will move part of this 40 percent back into bonds and part back into cash.  The bonds component will be a short-term investment grade index fund or ETF (basically high-quality corporate bonds) because I see bonds as a portfolio stabilizer rather than something I own for total return.  By buying short-term, I give up some yield (not much these days), but also experience much less volatility from the bond portion of the portfolio.

My 2018 Asset Allocation - Final Thoughts

All of the investments described above represent long-term bets on the United States, emerging markets, and major technology companies over a time horizon of ten years or longer.  These are not short-term trades.

As I've noted elsewhere, I am a risk-averse investor.  So I tend to carry way more cash than most professional investors.  What can I say?  That's just how I roll.

I am not going to comment on how this portfolio has performed because I do manage a few portfolios for clients (I have a registered investment advisory firm), and there are major regulatory restrictions on discussing investment performance.  Also, over time, I will shift this portfolio around as circumstances change.  As anything we put on the internet is forever--even if we delete it--it would be foolish to present this as a static portfolio or emphasize short-term returns.

I welcome feedback and thoughts on this asset alloction.

(Disclaimer: It goes without saying, but I will say it anyway.  Nothing in this post constitutes investment advice.  My own portfolio is quirky, idiosyncratic, and represents a snapshot in time.  It reflects my time horizon, risk profile, and perspective on the medium-to-long term.  Every person has unique risk tolerances, goals, life situations, etc.  Consult a qualified financial advisor before taking any action.)