Do it Yourself Asset Allocation.


the most important driver for investment returns is your asset allocation policy. 

Take time to learn the craft. 

Response of 100 per cent of returns.

On the same day BT fell 21% the FTSE didn't. 

Professionals Investors can't beat the Index, so buy it. 

ETFs by Descending Volatility:
- Property. 
- Emerging Market Equity. 
- Emerging Market Bond. 
- Large Cap Equity. 
- High Yield Bond. 
- Inflation-linked Bonds. 
- Investment Grade Corporate Bond. 
- Government Bond. 

Trade as it it was a single Stock. 

Think Macro, not Micro. 

Macro Factors:

Have to take a look at GDP. 
- Leading indicator is Purchasing Managers Index, that's a leading driver for GDP. When Earnings go up, the share prices go up. 

PMI speaks to Managers each month. in Industry about: Production Levels, New Orders, Supplier Deliveries, Inventories, Employment Levels. They ask if Business is better, the same or worse, in these five areas. a PMI of 50 is average, above is expansion. Although manufacturing is no longer a large part of the economy in US and UK, it's still a big predictor of recession or expansion. 

You have to keep an eye on GDP because Economic Growth drives growth for companies - or anything that gives you a hint as to where GDP might be going. When earnings go up, share prices go up. 

- Inflation vs Wage Growth also very important. US and UK are service economies, so free cash is very important. The level of Wages vs Inflation. If Real wages are falling than households will have less money to spend on things. 

- Central Bank Policy. Monetary Policy Committee on Bank of England Website. Go to great pains to explain their workings. 

- Politics. How much is the US spending on Infrastructure, and will that spill into growth? US is still the dominannt global driver in world economics, biggest economy, biggest stock market. 


You have to Diversify you portfolio by buying different Stocks. 
Dax, S&P 500, and FTSE, is not diversifying because they closely correlate one another. 

If you buy £1 of FTSE 100 and £1 of S&P500, risk-wise it's the same as buying £2 of FTSE 100 because they're so highly correlated. 

Whereas the UK Govt Bond and the FTSE 100 Zig and zag each other. that means you get diversification:

If you buy £1 of FTSE 100 and £1 of Gilts, Total Risk is less than £2 of FTSE 100, less than £2 of Gilts. 

Equity to equity correlation is very low. 

How do you allocate your allocation:

Common rule of thumb is to put 60% - Your Age into Shares. 
Age 20: 40% Equity and 60% Bonds. 
Age 50: 10% Equity and 90 % Bonds. 


Another way is called Inverse Risk Weighting:

% in Portfolio = 1/Risk. The riskier an asset type, the less you have of it in your portfolio:

Volatility of FTSE 100 is 20%.
UK Gilt Volatility is 5%

So gilts get a much higher rating in an inverse risk portfolio:

FTSE 100 Weight: 20%.
UK Gilt Weight: 80%.

But don't just set it and leave forever, Allocation is a dynamic process:

Let's say you have the above and the FTSE rallies, you now have, so weight of FTSE is 25% instead of 20%. 

You need to rebalance, by selling FTSE 100, by rebalancing. This is difficult because you have to buy the worst performers and sell the best performers. 

Simple Asset Allocation Rules:

1. Not Many Funds: 5 or less. 
2. Keep Fees Low. TER - Total Expense Ratio.
3. Equity Allocation = %60 - Age. 
4. Choose Big, Liquid Funds. (>£20 million)
5. Diversify across Asset Types (equity and bonds). 
6. Equity/ Bond Ratio to suit your asset types. 
7. Don't sell in a crisis. 
8. Don't try and time the market. 
9. Rebalance and keep allocation Strategy. 











 


























 
























Comments

Post a Comment

Popular posts from this blog

Global Credit Crisis 2020 April 4, 2020.

Global Credit Crisis 2020 April 4, 2020.  https://www.youtube.com/watch?v=W21RzZO3HYk Entering a deep and synchronised depression  Companies that have a lot of leverage, increased probability of default - global credit crisis. What is credit risk? Whenever an entity lends money, you’ll expect the money to be repaid in full at a date in the future, with interest paid along the way. But the higher the risk, the higher the interest payments.  If company has a higher credit risk, you’ll be compensate for the increased chance of default, where the company becomes bankrupt - the greater the risk, the greater the return, but the return or yield is greater.  Why does  a company go bust? Assets and Liabilities Liabilities - how do you pay for your assets? Equity - paid by shareholders Debt - Bond Issues. When the price of a company falls that has drop has to be mopped up by the equity, making it decrease, as the debt can’t shrink. Likewise when assets shrink, the equity ...
Read more

Inflation or Deflation 2020?

https://www.youtube.com/watch?v=WFiJw6QoTL4&t=3s What is Inflation? Look at the price of anything (bread) over any length of time and it goes up. Bread has quadrupled since the 80s. While it tends to go up, in any year the price of bread can drop below 0.0 that's deflation.  Go to Office for National Statistics for Inflation Figures: They look at thousands of goods in a consumer's "consumption basket such as shelter". There are urban consumers, argri users etc.  Basket changes as consumer tastes change.  Drivers of Inflation: Four Types: Demand Pull Inflation, Cost Push Inflation, Wage Push Inflation.  Rapid Expansion of Money and Credit = Demand Pull Inflation. Usually done by central banks to counteract a crisis.  Concern is that it will increase the price for goods and services: more dollars chasing the same amount of goods and services.  During 2008 and now the FED's balance sheet is now 6 trillion dollars. It makes loans, not grants.  Many Hed...
Read more

Bonds 2020 - Is It Crazy To Buy Them?

https://www.youtube.com/watch?v=RWrRVvPey1Q&t=259s Why Hold Bonds? - Government - capital preservation. Government Bonds tends to rally.  - Diversity - they're a good hedge for equity, and are always liquid.  You don't get them to get rich! They preserve wealth, not create it.  Risk and Return.  [bit here you don't understand about risk and reward].  Bonds aren't always less volatile than 07'25. The Volatile 20+ Treasure Bond is comparible with the Life Strategy 100.  - Capital Preservation.  During the 2008 Crash: 1-3 months Govt Bonds did almost nothing, just acted like cash.  Longer Duration Bonds went up as equity fell. So they're an effective hedge.  What if Markets aren't crashing? You may still want to diversify your equity. Find asset which zig when equitys zag.   - Are Bonds Expensive.  One of the reasons people give for not buying bonds at the moment (May 2020), is that they're expensive.  MORE HERE.  Kr...
Read more