My Portfolio – Detailed Asset Allocation for Equities

by Mike Holman

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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