Author Topic: Puzzled -What is my actual allocation at the moment? Pls help  (Read 3385 times)

Ozlady

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Puzzled -What is my actual allocation at the moment? Pls help
« on: January 11, 2016, 08:32:00 PM »
Hello Everyone

i have reading about people's allocation pre/post retirement.  Some allocate 80% to equity and 20% bonds and some choose their age to allocate accordingly...

ATM i am having difficulty figuring my current allocation ratio: mainly due to the fact i have a big property portfolio which throws me a nice passive income.

For the sake of illustration, what would this person's allocation be?

a) Stocks                                    1 million
b) Superannuation /401k             2 million

c) Own home (no mortgage)         3 million (include or exclude from calculation?)
d) Net rental property                  4 million (is this bond like?)

e) Defined benefit pension value     1 million (bond like?)


what do you include /exclude in the formula ? what is the figure ?

THANKS VERY MUCH!!!

johnny847

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #1 on: January 11, 2016, 09:08:35 PM »
I have no idea.

Superannuation/401k is not an asset class. That's a bucket you fill with assets.

ETA: It could be full of stocks. It might be all bonds. For all I know it could be 100% gold. I have no clue.

Ozlady

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #2 on: January 11, 2016, 09:39:38 PM »
Hi Johnny

Assume it is all stocks...now what?

MDM

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #3 on: January 11, 2016, 09:59:04 PM »
For the sake of illustration, what would this person's allocation be?

a) Stocks                                    1 million
b) Superannuation /401k             2 million

c) Own home (no mortgage)         3 million (include or exclude from calculation?)
d) Net rental property                  4 million (is this bond like?)

e) Defined benefit pension value     1 million (bond like?)

what do you include /exclude in the formula ? what is the figure ?
Opinions vary.

Assuming you intend to stay in your home, ignore its value.

Also ignore the pension value, much as one would ignore the NPV of expected salary while working.

Rental real estate is an asset class unto itself.  That leaves you with 100% stock / 0% bonds, which is inherently neither good nor bad.

Heckler

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #4 on: January 11, 2016, 10:18:27 PM »
#firstworldproblems


Nice problem to have!

MustacheAndaHalf

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #5 on: January 11, 2016, 10:38:24 PM »
I've seen it argued that a mortgage (own home or rental) is a negative bond: you make payments, and the bank gets the return.  Under that thinking, you would have 100% stocks, -100% bonds (3 million each).

My own take is to ignore the mortgage, since it displaces rent.  But a rental is a few properties in a specific location subject to the whims of that local market.  It's very different from the diversification you find in a REIT fund.  So if you mention asset allocation because you want a diverse portfolio, the rentals wouldn't be considered diversified.

Ozlady

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #6 on: January 11, 2016, 11:40:32 PM »
You assume wrong Mustache and a half!

There is no mortgage whatsover on the own home nor the rental properties.....yep own them fully all clear!

And i can assure you they are not located in a concentrated locality....

If that is the scenario, then what?

matchewed

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #7 on: January 12, 2016, 06:53:30 AM »
Well an asset allocation is generally talking about a portfolio. Your own home doesn't count in that consideration IMO. You are not making any money or getting a realized return unless you sell your home. So leave that out.

That leaves you with 3mil stocks (w/ the super annuation being treated as stocks), 1mil pension (I'd consider this more bond like but depending on the particulars like if it raises with inflation or how secure the company/organization it is with that may change and you can just view it as fixed income and not part of a portfolio at all), and finally 4mil in rental property which could be viewed in one of two ways, 4 million which throws off an income of X through rental.

Portfolios can be more than stock/bond. You don't need to cram these other categories into those two narrow categorizations. Treat them as they are.

Ozlady

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #8 on: January 12, 2016, 02:17:12 PM »
Thanks guys for taking the effort to reply...

Matchewed: not sure what you meant by "real estate can be treated in 2 ways...??"

The way i see it is perhaps the Americans are more stocks focused....that is why the stocks/bond ratio is quite important.....

Throw real estate (unless it is REITS..then it would be considered stocks hmm...) into the mix, and although it lends more diversification, it should be disregarded(?) huh?

BTW The defined benefit pension is inflation adjusted and rock solid , 100% funded (thank you for asking!)

Having read through, lets see what i have then:

Stocks plus superannuation (401 assume all stocks)          3 million
Def. benefit fund                                                             1 million

which leaves me a ratio 75%/25%






matchewed

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #9 on: January 12, 2016, 02:46:27 PM »
Well let's get back to the basics. Why do you need this information?

*Edit* I see my incomplete thought at what I posted. I was going to say that you could view the real estate two ways and then I thought about it and it's really only one way. You invested X amount in real estate. It is now giving you Y amount annually in income. Pretty easy to calculate returns that way and it doesn't change what it is. It's not stocks and it's not bonds. It's real estate.

I never mentioned disregarding anything except for your primary residence. You don't make money off of that so why count it unless you have plans to liquidate it?

Furthermore to my last point about treating things as they are just call them what they are.

X in stocks
Y in bonds
Z in real estate
Q in pension
« Last Edit: January 12, 2016, 03:13:42 PM by matchewed »

Ozlady

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #10 on: January 12, 2016, 03:25:58 PM »
Thanks Matchewed

I need the ratios as i want to see whether i am too skewed and heavily invested in 1 sector!

But i am beginning to hear what you say as to treat each on its own...the % split should be only relevant to stocks/bonds PERIOD.  ie leave all real estate out of the formula!

matchewed

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #11 on: January 12, 2016, 03:37:38 PM »
Thanks Matchewed

I need the ratios as i want to see whether i am too skewed and heavily invested in 1 sector!

But i am beginning to hear what you say as to treat each on its own...the % split should be only relevant to stocks/bonds PERIOD.  ie leave all real estate out of the formula!

Not exactly. Because if I have $10 in stocks and $.5 in bonds but 1mil in a real estate property am I overweight in stocks? No. I'm actually "overweight" in real estate. But that in of itself doesn't mean something is wrong. If you understand and mitigated the most common risks/understand the warning flags of other sorts of risks outside of your control there isn't much of a problem in being "overweight" in any particular sector.

So to go back to your original post; you have 8mil in portfolio assets - 37.5% in stocks, 50% rental property, 12.5% pension. Each of these asset classes will have their own return and are uncorrelated with each other so there really isn't any "overweight" in the scenario you're asking. It's a just fine asset allocation if the individual understands all the risks, accepts them, mitigates them, and anticipates conservative returns.

Ozlady

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #12 on: January 12, 2016, 04:47:41 PM »
Thanks Matchewed

i can hear what you are saying:)))

MustacheAndaHalf

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #13 on: January 12, 2016, 06:17:54 PM »
There is no mortgage whatsover on the own home nor the rental properties.....yep own them fully all clear! And i can assure you they are not located in a concentrated locality....
Here's what Vanguard's REIT fund looks like:
https://personal.vanguard.com/us/funds/snapshot?FundId=0986&FundIntExt=INT#tab=2
24% Retail REITs
17% Residential REITs
14% Office REITs
...

Since half your assets are tied up in rental properties, that's your biggest risk.  It will be hard for even $4 million in rental properties to compare with Vanguard's REIT, which is diversified across type (malls, office buildings, rentals) and location (different states).

Ozlady

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #14 on: January 13, 2016, 03:59:48 PM »
3 words why i prefer to hold my real estate assets to REITS:

a) Control
b) Knowledge
c) Leverage.....

I have been in this game for twenty years....at the risk of boasting, made (and kept) my first million this way...

opnfld

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Re: Puzzled -What is my actual allocation at the moment? Pls help
« Reply #15 on: January 13, 2016, 05:58:32 PM »
It's a just fine asset allocation if the individual understands all the risks, accepts them, mitigates them, and anticipates conservative returns.
Yeah, it's risk management.  I'm about to turn my primary residence into my first rental.  In terms of risk, it feels like a bond, so I'm likely to reduce my bond allocation because I want to keep the same level of risk.  The question then becomes "what is my comfortable allocation to stocks versus bonds?".  Real estate is out of the picture, except that it affects my overall impression of how much risk I'm comfortable with.  Not very scientific, but investing isn't really a science, is it?

I can't consider my rental to be the totality of my bond allocation because I can't rebalanace from my rental house into stocks.  So I need to reduce my bond allocation at some fraction of the value of my rental.  Likely I'll glide from 75/25 stocks/bonds to 80/20 or 85/15.

I guess the other question I need to ask myself when I have a rental: should I stay in REITs?  I currently have 10% of my equity allocation in REITs and I think I'm comfortable retaining that.  But I'll continue to consider it on the equity side of things, rather than my own personal real estate holdings.  Anyone have an opinion on that?