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Asset Allocations
Late last week my RRSP transfer from mutual funds into Questrade completed. It feels as if I lucked out in that the 5 worst days of the year on the market happened while the cheque was in the mail to move money.
Trying to devise a strategy for investing that is both safe, has the potential to beat the market, and protects me from myself lead me to read a couple of books on portfolio management theory and devise an overall approach to managing my investments.
The take away from the world’s best investors is that the best approach for investing is:
- Diversification is the only guaranteed way to reduce risk and maintain good returns
- Rebalance your portfolio no more than twice per year to reset your risk exposures to account for drift
- Don’t trade on emotion – you are your own worst enemy
- Always consider the tax implications and costs to trade
One of the biggest lessons I got from working at an investment management company is to hedge all your bets. You never put all your chips on red because your analysts think it’s the best bet. You buy the whole board and make small bets. This way you maintain diversification – which lowers the variance of your whole portfolio. And provided you can do better than 50% on picking winners and losers the portfolio will do better than it’s benchmark.
Extending that to the asset allocation for a complete portfolio is relatively straight forward. It starts with the question: What should my portfolio look like at a high level? To answer that I’ll go through the break down of how I built my portfolio.
The asset types I went for were:
- 40% Bonds
- 50% Stocks
- 5% Precious metals
- 5% Commodities
Noticeably missing from this list is REITs. I own a home which is more than enough exposure to real estate for my liking.
I’m targetting 90% of my investable assets into broad low cost ETFs. 10% is individual stocks which I believe have good moderate term prospects to beat the market.
Within each broad asset category things are further diversified:
Bonds:
- 1/4 High Yield corporate bond ETF (HYG)
- 1/8 DEX index Canada government & municipal bonds (XBB)
- 1/4 Canadian Real Return Bond ETF (XRB)
- 1/4 Canadian Hybrid Bond ETF (XHB)
- 1/8 Emerging Market EFT (LEMB)
For bonds I wanted a good mix of corporate, government, and international bonds that were hedged against interest rate changes a bit with the Real Return bond (XRB). Once I get a chance to compute the co-variances on this selection I may re-allocate. In particular it seems a bit under-exposed to US and EAFE bonds.
Stocks:
Admittedly this isn’t as diversified as I’d like, future purchases may go towards something very broad like the MSCI World ETF (XWD) or Vanguard World ex US ETF (VEU). I’m betting on Apple because they have a strong product lineup, entering new markets next year and have been doing a lot of stock buy backs. Boeing is my bet that if oil stays low, airlines around the world will see billion dollar profits and funnel that back into growing their fleets with new planes. Boeing is also a hunch that it’s possible to get ahead of the next trend by thinking critically about where profit from the current trend could end up.
Other:
There are so many options for things to invest in that it’s hard to choose. My hope is that this portfolio will be low risk and have great returns.
New money added to the RRSP will be used strategically to keep the portfolio in balance which will hopefully reduce the need to make big re-adjustments. The way to think about this is that I will be buying the assets which have become the least expensive – thereby dollar cost averaging down. It’s a way to frame things to avoid panic selling at the worst possible time.
It was kind of a fun week to research, read and figure out how to invest things. Learning is, of course, an endless journey and I’m excited to iterate and get better at investing. It’ll be exciting to see how this portfolio does over the next year.
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