My Portfolio – Detailed Asset Allocation for Equities

by Mike Holman

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Today I’ll talk about the equities portion of our portfolio which represents 75% of our entire portfolio. This section of the portfolio is a combination of low cost mutual funds, ETFs or exchange traded funds and one stock.

The breakdown for equities by type is as follows:

The first number is as a percentage of equities portion, the second number in brackets is a percentage of the total portfolio:

Canadian equity 20% (15%)

US equity 33% (25%)

International equity 33% (25%)

Emerging Mkt 8% (6%)

Reits 5% (4%)

How did I come up with this allocation? Good question…

Canadian equity: My Canadian equity portion has gone from about 90% before last year to around 30% last fall and now goes down to 20%. The reality is that for Canadians to be diversified they need to limit their Canadian exposure which is tough to do when you spend Canadian dollars and tend to think that your home country is a lot more economically important than it really is. I’m not too concerned about currency fluctuations since my investment time horizon is fairly long so I can handle currency swings. The Canadian dollar is at a 30 year high so maybe loading up on Canadian dollars is not the greatest thing at the moment.

US equity: As a percentage of the world equity, I believe US equity is around 45%, in my portfolio it’s only 33% of the equity portion. I don’t have any good explanation for the amount I choose except to say that it’s “a lot more than I had before”. Perhaps along the lines that it’s hard to reduce your home country holdings, it’s also hard to put 45% of your equities into another one country. US equity returns have been hampered by the rising Canadian dollar but according to Bernstein the best time to buy is when things look their worst. Feel free to convince me I should have more (or less) US equities!

International equity: This is Europe + Asia - this portion should be 33% according to Martingale, so I have the proper allocation according to it’s world equity weighting.

REITs: I’ve chosen 5% for this. As mentioned in an earlier post, this asset class has a low correlation with other types of investments, namely equities. I’ve only looked at Canadian REITs but I will also be considering US (such as VNQ) and international REITs as well. I really have no idea how much I should have in real estate but I’ve heard anywhere from 5% to 20% of your portfolio should be in real estate. Anyone have any input on this one? Should I increase this amount?

Emerging Markets: The global market capitalization is 9% and I have 8% so that’s pretty close. This section makes me nervous for two reasons, the emerging markets have had a great run over the last few years and although it could continue for quite some time, it could also come crashing down in a hurry. Another thing is the China factor, it’s really hard to believe that this market will not hit a brick wall at some point and if that happens, all other emerging markets will get hammered as well.

Another aspect of emerging markets that I’m not keen on is that the long term returns don’t seem to match up with the incredible risk levels involved. One of the tenets of Bernstein’s Four Pillars (and many other books) is that increased risk leads to increased returns over the long term but I’m not sure if that’s true in this case. I have a separate post for this issue.

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{ 7 comments… read them below or add one }

1 CrunchMoney

nice allocation! I agree with your geographic allocations…..I still can’t understand why so many people keep most of their money invested only in Canada! I think having some international exposure is extremely important especially since the run we’ve been enjoying in Canada.

2 FourPillars

Thanks CM – I can’t criticize other investors for having mostly Canadian equity since I was in that group as well until last year.

I think a lot of it is a holdover from the foreign content limit days when you had to have 80% and then 70% Canadian. Most investors got used to that and have a hard time lowering their Canadian exposure.

It wouldn’t be so bad investing in a small economy if it were more diversified but unfortunately our economy has lots of financials, energy, materials and that’s it.

By the way – I added you to my blogroll.

Mike

3 Canadian Capitalist

Your equity allocation is a bit confusing (for me) because normally REITs are considered a separate asset class and not as part of equities.

33% sounds about right for US equities because you have overweighted Canada at 20%. 45% of 80% is roughly 36%, so you are a bit less under weighted, but I don’t see that as a big deal.

REIT allocation recommendations are all over the map. Apparently, real estate risk-reward profile is between that of bonds and stocks, so 5%-10% sounds about right to me. I don’t think there is a right or wrong answer here.

4 FourPillars

CC – I tend to lump REITs in with equities because in my mind they are closer to equities than fixed income. From a volatility point of view, I consider the fixed income portion to be the stable portion of the portfolio whereas equities & REITs are more volatile even though hopefully REITs will not correlate with equities all that well.

5 ThickenMyWallet

Can you clarify what you consider international and emerging markets? You comments seem to imply you lump China into both. Thanks.

6 FourPillars

Hi Thicken, by international I’m referring to EAFE – Europe, Asia & Far East as in the MSCI index. I consider China to be part of the emerging market class.

I’ll have to take a closer look at what is in EAFE – obviously there are some asian countries that are fairly well developed and some that aren’t.

Is this what you are thinking as well?

7 ThickenMyWallet

Yes, you have to be careful with the international/emerging markets distinction. Most of the products I see tend to put Japan in international and China in emerging markets.

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