I have had some extra time of late, and have delved into the rabbit hole of asset allocation. I have traditionally maintained an asset allocation balanced between stocks and bonds, and of late that has made me nervous because these both appear to be in bubble territory due to the artificially low interest rates being held down by quantitative easing. My adventure started with this blog post by Mebane Faber on the performance of various asset allocation strategies over time.
This was a nice primer to how different financial schools of thought look at Asset Allocation. Vanguard has a nice overview of some of the principles of Asset Allocation, though again it is just limited to stock classes vs bond classes. If you use Quicken, you know their asset allocation tools are pretty basic, and in this investing environment possibly counter productive (if interest rates start to rise – both stocks and bonds will take a hit). So it was nice to see some other more complex views of Asset Allocation Categories.
Having said that, the big takeaway for me was maybe it didn’t matter much. Note the chart at the bottom of the article shows the various allocations all performed pretty close to one another over time. So maybe the investing world does just boil down to investing in a balance of equity vs debt, and all the subclasses in some of these strategies are just noise.
The financial press constantly hammers the point home that Asset allocation is very important, and that each person has to figure out what allocation is right for them, yet everybody has a different opinion. So after factoring all this information in, and my worries about both the valuation of the stock and bond markets, I have decided to take the super diversified route and tracking my asset allocation across more granular categories. I have set target allocations for TIPS, REITs, Equitys, Emerging Foreign Markets, Developed Foreign Markets and more. I am hoping this will reduce the shock of any bubble bursting, without greatly reducing my rate of return. This decision also commits me to have a mechanism to track all this – to see if it does make sense. I have developed a prototype that I am happy with, and hope to add this mechanism to Puget Investor in future months.
I’d be curious to hear if there are any other thoughts on asset allocation out there – please leave a comment if so. I guess I haven’t fully emerged from this rabbit hole, and am still up for a little more exploring.
Do you think different accounts (IRA versus individual accounts) should be asset allocated separately or do you look at them all together since they have different tax implications?
I come up with a global asset allocation (less a cash reserve) across all accounts. Then to meet my allocation, I hold REITS and Bonds in my qualified accounts because that will always be taxed at ordinary income. Then any Non-Ira taxable accounts I hold stocks and try to never sell them before they qualify for a long term gain – or if necessary sell them if I have a short term loss.
I think that’s the right strategy – but I’m no expert.