Author Topic: Worldwide diversification - please rate my Asset Allocation  (Read 3333 times)

DaKini

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Worldwide diversification - please rate my Asset Allocation
« on: March 17, 2014, 05:13:18 AM »
Hello,
after reading quite some books, i plan to use the following asset allocation and i seek your advice if this is a sane thing to do.
The main insight is that no one can know which market will perform how good in the future, so the idea is to "own the world" in a balanced portfolio. This also should yield a diversification effect.

Please also keep in mind that im from germany (if that matters, which i think it should not). I work a quite secure government-like job so no need for a big emergency fund. We also have some additional safety grids installed, so please do not discuss the emergency fund this time.
It is the asset allocation im interested in beeing assessed.

So here it goes:

Overall portfolio
I split up my portfolio in a "risky" and a "riskless" portion; risk is adjusted by increasing/decreasing the riskless portion.
The overall target balance is 80/20 risky/riskless. In case of huge emergencys, the riskless portions will be liquidated in order of liquidity.
I will rebalance with the fresh cash inflow so i save on fees (unless there is a huge difference in performance big enough to pay for the rebalancing costs).

The 20% riskless portion consists of:
  • Cash and Cash equivalents. Should be no more than 3k EUR (first stage of emergency fund).
  • Short term german government bond fund
  • Cash value of old capital life insurance (*)
  • Balance of old building savings agreements (*)

The 80% risky portion consists of:
  • 55% Developed Markets
     
    • 20% US/Canada: MSCI North America
    • 20% Europe: DJ STOXX 600
    • 5% home market: DAX+MDAX (**)
    • 10% Asia/Pacific
  • 25% Emerging markets
  • 10% REIT worldwide
  • 10% Industry ressources futures-contract-ETF

What do you think?

Thank you in advance!

_________________
Remarks:
(*) I will reduce that and shift it into the bonds when there is an opportunity to do so with good tax opportunity. One of the savings accounts will be tax free in two years for example. This should yield me more liquidity and more flexibility when rebalancing in 2008 crash situations. Curently they are hard to liquidate. Capital life insurance is mostly non-contributory alreadyand will probably also be shifted to bonds when the tax exemption kicks in (old contracts with 3.5% guaranteed yield on the savings portion).
(**) I am very interested in this. I know this is "home bias" and probably should shift that into the Europe portion. What do you think?

AlanStache

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Re: Worldwide diversification - please rate my Asset Allocation
« Reply #1 on: March 17, 2014, 05:24:17 AM »
how old are you, are you nearing any govt retirement money?

yes being in the dax and general eruope fund may be a bit redundant. 

maybe look at some bond funds that are larger than just germany.  some of these bond funds might not be truly conservative plays, ie emerging market bonds or 'junk' corporate bonds, but still might be worth holding.

are you mostly in etfs?  have you checked the expense ratios?

Also be careful with the developed asia funds, I have seen some that are like 90% Japan, or a pan-asia fund that is 85% china.  MorningStar does a good job of braking down what a fund holds.

EDIT: and are you near FIRE or just getting going?  Otherwise nothing jumps out at me as bad.
« Last Edit: March 17, 2014, 05:31:31 AM by AlanStache »

DaKini

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Re: Worldwide diversification - please rate my Asset Allocation
« Reply #2 on: March 17, 2014, 05:39:13 AM »
how old are you, are you nearing any govt retirement money.
Im in my very early 30s, so no retirement money at the horizon and a lenghty time to invest. There will be some pension-like retirement in addition to my social security retirement benefit.

yes being in the dax and general eruope fund may be a bit redundant.
I did choose this 5% based on two facts: I started with some dax investments some years before i knowed nything about diversification. Now i think it would perhaps be wise to be a little overweight in one of the worlds strongest economys and german corporations have a great deal of international exposure. Owning the dax seems also to be a good idea cost-wise because they are my lowest expense investments.

maybe look at some bond funds that are larger than just germany.  some of these bond funds might not be truly conservative plays, ie emerging market bonds or 'junk' corporate bonds, but still might be worth holding.
Thought about that also. However i want to reduce risk as much as possible in the riskless part of the portfolio. If i wanted to take on additional risk, i would increase the riskier assets in the risky-part, possibly also adding new asset classes (like junk bonds).
I need the risless money there in case something happens, so i need not touch the risky assets.

are you mostly in etfs?  have you checked the expense ratios?
Im nearly all in ETFs (>95%) and the remaining individual stocks will be faded out when my tax free allowance permits selling it without paying capital gains tax (in 2015).
Im also aware that cost ratio is one of the major concerns. Currently i'm mostly with iShares because i dont want to own swap based ETFs. I will assess the market from time to time if there are better products out there.
Do you see a problem with this?

Also be careful with the developed asia funds, I have seen some that are like 90% Japan, or a pan-asia fund that is 85% china.  MorningStar does a good job of braking down what a fund holds.
Thanks for that tip, i will reasses that. I tried to get a good mix of Japan/Asia/Australia, but much of asia is still included in the EM funds.

Thanks for sharing so fast!
« Last Edit: May 13, 2014, 01:10:53 AM by DaKini »

AlanStache

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Re: Worldwide diversification - please rate my Asset Allocation
« Reply #3 on: March 17, 2014, 05:53:07 AM »
I have seen ishares have a bit higher expense ratios than vanguard.  definitely look into this and other fund families. 

given your age it might be a bit conservative, but as the total net worth increases maybe you can increase the risky part and still have the same dollars/euros on the safe side?  Also it can be a mental thing learning to relax with daily fluctuations.

You hit on a basic problem we have all see in that everything is so interconnected that it is all highly correlated.

"spaw based ETF"  what is spaw?

do you have this split between different accounts?  is some of it part of a German -401k type things?  part of dollar cost averaging and reblancing is lost if you cant sell winners to buy 'losers', it makes you my when things are cheap and you might not otherwise want to buy something going down.

I too generally use new contributions to rebalance when something gets 1000$ out of target I buy when I can, or sell if needed.

there was an asset allocation thread here a month or two ago, might be worth a read for you.

DaKini

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Re: Worldwide diversification - please rate my Asset Allocation
« Reply #4 on: March 17, 2014, 06:00:20 AM »
Sorry, i meant "swap based" (and im aware that even with ishares there is a swap component, but its smaller).

Yes, this is spit over different accounts, so i can take advantage of trading costs (and also use ocassional "move your portfolio to us to get additional 1% yield" offers).

There are no 401k stuff like things here in germany, or at least none where the high hidden fees leave me ahead. currently i have seen no better option as to use taxed accounts.

On the rebalancing thing, my IPS allows for selling winners to buy loosers, but only if the dip is significant. I just dont know what is "significant", currently it is to be evaluated by comparing trading costs. A single Rebelacne action costs me about 20 Euros round trip, so that makes only sense if i can rebalance some thousands.
What rebalancing bands do you use?

foobar

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Re: Worldwide diversification - please rate my Asset Allocation
« Reply #5 on: March 17, 2014, 08:12:13 PM »
Personally I don't like to have any asset category that is less than 10% so I might just through that into the Euro fund.  5% just doesn't swing the performance enough either way.  But in general it is pretty solid. You can debate stuff (20% EM versus 25%) but that is all in personal preferences range.

DaKini

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Re: Worldwide diversification - please rate my Asset Allocation
« Reply #6 on: March 18, 2014, 01:30:08 AM »
Thanks for your opinions!

I tried to get a rough GDP based alloation but like every human i prefer even numbers. Its easier to deal with and as you said, +-5% are not that significant anyway.