Back in August I introduced the concept of readers posts so that different perspectives other than those that I post and the comments that are posted in response could be seen. So far only one person has taken up the challenge which is a shame because different perspectives was one of the outputs that I had hoped to achieved on this blog rather than just me talking to myself. These different perspectives would allow us all to head off and do our own further research which could only be a good thing. The person who has taken up the challenge is Global Capitalist who's previous post is here and who today discusses personal asset allocations.
If you would also like to take part with readers posts then drop me a note here “contact.retirementinvesting at googlemail.com". Remember the more posts the more positives and negatives we can all learn about. As always please do share your comments.
So now it’s over to Global Capitalist:
Originally, I had intended to use this post to present some correlation data between the different asset classes that will make up my portfolio. I have found consistent data very difficult to get hold of, and to present the correlation data today would require some serious manual number crunching that I simply do not have the time to do.
First of all, I will start by saying that my current choices of asset classes are based on various discussions within Smarter Investing: Simpler Decisions for Better Results by Tim Hale.
The asset classes that I have chosen are as follows:
UK equities - 12%
UK value equities - 4%
UK small company equities - 4%
World ex-UK equities - 20%
World ex-UK value equities - 8%
World ex-UK small company equities - 8%
Emerging market equities - 8%
Global commercial real estate - 8%
Commodities - 8%
UK gilts - 20%
Readers who are familiar with Modern Portfolio Theory (MPT) will be aware that many studies have demonstrated that one can actually increase returns (according to MPT) and reduce risk at the same time by including a small quantity of bonds within an otherwise all-equity portfolio. At a basic level, my portfolio is 80% equity based and 20% bonds.
In a bit more detail, my policy allocation is globally tilted, although I do have a policy allocation of 20% for UK equity, of various kinds. World (excluding UK) equity makes up 44% of my policy allocation, just of 18% of that 44% is made up specifically from emerging markets, which according to Tim Hale does not correlate well with other world equities (which is desirable for diversification purposes). Both the World Equities and UK equities sections of my policy allocation are divided between general equity, value equity and small cap equity. These three categories I believe do not correlate well together and so should provide further diversification benefit within these two large categories.
Global commercial real estate and commodities provided further negative correlation in respect to World (including UK) equities and so should (according to MPT) increase returns whilst reducing risk.
Whilst I may not be able to provide some real correlation data right now, I am working on an automated system that will be able to report this for me. When I have this running correctly, I will further post some correlation data for these exact asset classes using past data. For the purposes of back testing and for benchmarking, my asset classes will ideally track the following indexes:
UK equities - FTSE all-share index
UK value equities - FTSE UK dividend plus index
UK small company equities - FTSE small cap index
World ex-UK equities - FTSE World ex-UK index
World ex-UK value equities - MSCI World ex-UK Value index
World ex-UK small company equities - FTSE Global small cap ex-UK index
Emerging markets equities - FTSE all world all emerging index
Global commercial real estate - S&P Global REIT
Commodities - S&P Goldman Sachs Commodity index
UK gilts - FTSE British Government (all stocks) index
In the next post, I will discuss what I currently hold, and how I will transform my holdings to match my policy allocation discussed within this post.
Remember, this post is not rhetorical and I am not an investment professional. Please do not take any of this post as being advice because I am not qualified to give advice. Where possible, I reference source material for the reader to interpret themselves.