Reviewing My Asset Allocations

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At the beginning of every year I review my asset allocations to ensure that they still align with my original goals and what I want to accomplish with my investment portfolio. If my portfolio is misaligned or there are certain asset classes that have done better, I try to identify them and correct my asset allocation with my new purchases. This is part of my bi-annual, re-balancing act to make sure my investment portfolio is good to go for the rest of the year.

This year I decided to go in depth and share a little bit of my analysis with my readers. Of course, as I always mention, each investment portfolio should be catered towards the individual. Not everyone’s goal is the same and there are always different reasons why someone is investing in a certain way versus another. What you’ll see is what works for me, but might not work for you. So here goes…

Asset Types

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Equities – Not surprisingly equities (stocks) make up the largest part of the portfolio. I’m focusing on long term growth and mainly using index ETFs to have a balanced portfolio (more on this later). In fact at a 61% equity holdings, I actually find this to be a fairly conservative portfolio, but I did separate out REITs to a separate category which takes me closer to 67% in equities. I’m somewhat happy keeping my equities in the 60-70% range. I do like to have some kind of protection in case market turmoil hits us again.

REITs – I’m actually up in the air as to whether real estate trusts should actually be its own category and deserves the 6% allocation in my portfolio. Don’t get me wrong, I like real estate, but REITs really only offer the prospect of regular dividend payments. This is great for retired folks who want a steady income, but for a growth portfolio it really hampers the portfolio’s potential. My REIT allocation actually started off at closer to 10% of my portfolio at the beginning, but I’ve been slowly neglecting this sector and focusing on diversifying more. Additionally, the difficulty in tracking whether dividend payments are actually return of capital or standard dividends gives me a bigger headache during tax time than I want.

Bonds – I talk about bonds a lot and how it’s important to have them in a portfolio, even if they are extremely overpriced at the moment. Bonds are there to act as a cushion in case the equities fall since there is a bit of negative correlation. At 9% bond allocation, I find that’s a little low for my portfolio and will most likely boost it up a bit. The reason why my bond allocation is so low is probably due to the run up of stocks over the last 6 months, which have seen many indices reach all time highs. To protect myself from a potential bond correction, I’ve been splitting my purchases between short term bond funds (less than 5 years) and one with a standard mix (short and long).

Preferreds – Many people probably don’t even know about preferred shares, but they make up the biggest proportion of my fixed income. A bit more riskier than bonds (see the 20% drop in late 2015- early 2016) , but higher yielding by a far margin at 5%. Rate-reset preferred shares are interest rate sensitive. This means if interest rates go up, the price of preferred shares actually go up. This makes them somewhat of a hedge against rising interest rates, however, if interest rates should actually drop, then a capital loss would occur. Regardless of the capital gains and losses, the yield itself makes it more than enough to be an attractive asset class.

Cash – At 8% cash I’m being way too cautious, but that’s only because it’s re-balancing and tax season for me. I’ll need the extra cash to buy assets to help me reset my percentages back to where I’m comfortable. Also since tax season is around the corner, I’ll need to stay liquid to pay off any potential extra taxes that I will incur from interest and dividends that I’ve collected throughout the year. I generally like to keep my cash reserves under 5%. There’s actually no reason to have your money sit idle when there are so many investment opportunities out there that can have your money work for you. Even the notion of having a 3 months emergency fund is foreign to me since I utilize a short-term line of credit to cover any unforeseen expenses. With such a liquid portfolio, I can easily free up cash in 3 days if an emergency eve arises.

Regions

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I always talk about diversification and I make sure that all my investments are focused on the world market and not Canada alone. I love Canada. I live here. But when it comes to investment opportunities there are many other countries, continents and markets that the Canadian market just doesn’t tap into.

When I look at all my assets as a whole, it’s not surprising that most of my holdings are still Canadian. That makes perfect sense. I still live in Canada so it’s important that my assets are tied to my country. The only reason why I even have 47% of my assets as Canadian is because my entire fixed income portfolio is in Canadian assets. This makes perfect sense. Why would I want interest income in a currency I can’t use and have to convert? Also, with my preferred shares portfolio, I’m taking advantage of the dividend tax credit that essentially boosts my yield by another 1 or 2%.

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If I take a look at my equity holdings, there is an entirely different story that plays out. I’m not invested in Canada as heavily and there are specific reasons why that’s true.

US Holdings – The United States makes up the majority of my equity investments. And that’s for a good reason. The US is the biggest market, it’s also the most diversified and the engine the drives the global economy. Despite President Trump running the country, America will continue to innovate and provide value towards the economy. You can’t stop the Microsoft’s, Apple’s and Coca Cola’s of the world easily. Companies will always find a way to profit. It could be said that my US holdings are a little high, but there are a few reasons for that that I’ll explain later.

Canadian Holdings – Canada isn’t even my next largest holding in equities. I actually try to keep it around 15%, so even at 16% is higher than I really want it to be. The reason why I don’t keep that much in Canadian assets is because we make up less than 3% of the world’s economy. Additionally, Canada is very concentrated in its industries. The two major sectors being natural resources and financials. I like to be a bit more diversified in my equities than just those two sectors. The one benefit of holding Canadian corporate stocks is the dividend tax credit. So it makes sense to take advantage of them in a non-registered account.

Global Holdings – The economy is global now and there are many different countries that have markets larger than Canada. With powerhouses like Germany, Japan and Britain, it’s important to have exposure to those marketplaces. I like to keep the global market around 25% of my equity holdings or 20% of my entire portfolio to give me exposure to those other foreign markets. Since Canada and US had amazing years last year for equity growth, I’d expect the rest of the world to play a bit of catch up.

Emerging Markets – In the world economy, there are many countries that grow faster than Canada and the US. These emerging countries offer a higher reward at the expense of higher risk. I generally try to keep my emerging market holdings to around 5-10% of my overall portfolio. Like REITs though, I feel if your portfolio is small, the effect of actually holding emerging market equities has little to no benefit. It’s probably better to simplify than having this asset region as an investment altogether.

ETFs vs Individual Stocks

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I’m a firm believer in using indexes to invest and I still do, however, when I first started investing a bit over 10 years ago, I actually picked my own stocks. I wanted to be like Warren Buffet until I realized I couldn’t be like Warren Buffet. Nevertheless, I always had a portfolio of ten individual stocks, but nowadays, that has dwindled down to just 6. Why? Because I embraced the Couch Potato formula of just indexing.

In the past few years, any new funds that I add to my investment portfolio has always gone to my index funds, however, I still have holdings of my 6 individual stocks that have done quite well over the last decade. This includes Microsoft, which I have written about.

I also made the mistake of buying REITs based on individual stocks rather than using the index. When I first looked into REIT funds I realized that the top 4 holdings contributed to over 75% of the entire index. I concluded to buy the 4 instead of actually buying the ETF and incurring a MER, but the headaches surrounding REITs is probably not worth the effort. In the end, I feel that REITs are a good class if you’re looking for regular income, but maybe not for a growth portfolio.

Slowly, over time the Index ETF holdings will start to become the lions share of the equities that I hold. I do predict that eventually that it’ll amount to probably 90% of all my equity holdings. I still do enjoy some form of individual stock picking, but the time and commitment to do the research on the marketplace, reading Gardner reports, crunching financial ratios and the like turn me off. If all those things I mentioned don’t make any sense to you, then don’t pick individual stocks.

My individual stocks are also the reason why my equity holdings are skewed so heavily towards US holdings. Quite a few of my individual stocks are in the American market, so it imbalances my portfolio. I’ve been keen to stop investing as much in the US markets over the last few years because of how my individual stocks have performed and my need to diversify into other regions.

My Character

I certainly wouldn’t classify myself as an aggressive investor. I don’t pick a lot of individual stocks, nor am I into gambling on “hot” stocks. I probably own more fixed income assets than your normal DIY trader. I try to keep my equity to fixed income ratio around 75% to 25%, but more recently I have started to shift even more towards the 70% to 30%. This is actually getting quite conservative since the benchmark for someone risk adverse is closer to 60% to 40%. For someone, that is maybe younger and an aggressive investor, they might use a ratio of 80% to 20% or even 90% to 10% on stock to fixed income.

I also wouldn’t label myself as risk adverse since most of my holdings are still in equities and I probably hold more volatile fixed income assets than most. These numbers can always change, however, depending on circumstances that happen in my personal life. So it’s good to know just what works best for you.

I’d also say my portfolio is a bit more complicated than it needs to be. I originally modelled my portfolio after the Uber Tuber Couch Potato formula. In its latest version, the Couch Potato models are much more simpler and probably easier to maintain than the one I have. Overall I’m comfortable with my own personal portfolio, complications and all.

What’s Next?

I will probably re-balance my portfolio to add more fixed income and continue to add to my global equities since I like to see that be closer to 20% of my portfolio by region.

I don’t foresee myself selling off my US assets despite the hoopla surrounding President Trump. I’m still a firm believer that the American economy will adapt and adjust to whatever policies the Trump administration creates. American corporations have always been resilient, they’re smart and will always find a way to profit.

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One thought on “Reviewing My Asset Allocations

  1. Pingback: What’s In My Investment Portfolio? | Financially Yours

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