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Diary of a Dumb Investor: asset allocation is only for the rich

How have I been sitting on nearly 23% cash without noticing?

 
Diary of a Dumb Investor: asset allocation is only for the rich

“URGENT: MUST *BUY* NOW!!!”

Yes, you guessed it, I signed up to receive email newsletters from the some of the more excitable investment websites. Whoever writes their hot-headed missives seems to be in a state of permanent agitation, panic-stricken that a reader won’t act fast enough to act on their recommendations. Overly caring perhaps. It must be a stressful job.

I, on the other hand, have been trying to position myself at the other end of the investor scale: the sophisticated, analytical sort who is powered by the clear waters of analysis rather than sweat and adrenaline.

Last week I wrote about how I was exploring the use of ratios to pick shares as a value investor. I was going to follow that up with a look at ‘asset allocation’.

‘Asset allocation, not stock selection, accounts for 90% of your returns, so make it 90% of your investment focus,’ writes Citywire columnist and more knowledgeable financial sort, Mike Deverell.

By that he means making sure you have a spread of assets in your portfolio. These might be bonds, shares, commodities, cash, ETFs, property, funds, investment trusts. Then you need to think about your regional exposure, ticking off Asia, the US, UK, Europe etc.

It’s pretty simple stuff and I’ve had this sort of diversification vaguely in mind since the beginning, aiming to maintain a bit of a spread in my portfolio.

My portfolio: Click to enlarge

But proper asset allocation is like gold shoelaces and strident tax avoidance: only for the rich.

Impoverished sods like me just can’t afford the diversification that better-heeled investors can stretch to, what with their dozens of different holdings.

If you’ve only got 10k, charges on investments prevent you from spreading your money too far. My current basket of seven investments is probably too much considering the charges.

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13 comments so far. Why not have your say?

Mike Deverell

Nov 26, 2012 at 14:01

You have worked out the problem with your portfolio but identified the wrong reasons for it.

Your portfolio is more than big enough to get the diversification you need, provided you invest in funds.

With £10,000 you could invest in 10 funds with £1,000 each, or 20 funds at £500 each. These days you can do this with relatively small amounts and with very little in initial charges or switching costs.

Your problem is that you are trying to be too clever. You don't have a big enough portfolio to select individual stocks without being either under-diversified or it costing you a fortune in dealing charges.

You'd be better off buying trackers or at least well diversifed active funds. Or even buy a few good old fashioned managed funds which have holdings in stocks and bonds.

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wayne roberts

Nov 26, 2012 at 14:30

Diversification means you can sleep at night but won't ever be rich as wins just cancel out losses.. Try no diversification - put all your eggs in one basket and watch that basket like a hawk, your account will soon start moving..

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Keith Cobby

Nov 26, 2012 at 15:33

You are proposing speculation Wayne, not investing.

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Anonymous 1 needed this 'off the record'

Nov 26, 2012 at 16:57

try just investing for growing income and forget about making a fast buck....

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Bernard Bedford

Nov 26, 2012 at 17:14

I agree with the general sentiment about using trackers but not with HL who will charge you £24 a year for each tracker. If you have £5k in one tracker that's not a big deal. If you have £500 or £1000 it's a huge hit on the annual charges and destroys the point of using a tracker.

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Jonathan Bond

Nov 26, 2012 at 17:31

Mike, Anonymous 1 and Bernard are all right, of course.

But a sensible approach wouldn't leave much for the Dumb Investor to write about, would it? :)

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gggggg hjhjkl;'

Nov 26, 2012 at 17:46

After 14 years of investment, asset allocation is my main focus, along with "tax avoidance", a very popular topic with hypocritical politicians at the moment.

My main reason for asset allocation is not theoretical, but as a result of its benefit against stock picking, as shown by the value added breakdown published by a number of investment trusts. Here it wins hand over foot on a continual basis.

For me it works, but it is not easy. particularly in certain sectors, such as direct property investment through investment trusts, where capital values are currently continue to fall.

Additionally it also brings a certain level of diversification, as mentioned above, which has also helped over the years.

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Joe Nooks

Nov 26, 2012 at 17:48

One of the things missing from the table of your portfolio is the date of purchase. It's one thing to show a gain of 10% but if you made the investment 5 years ago you would have been better with a building society. Moneyextra.com allows you to enter the date of purchase.

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10Bagger

Nov 26, 2012 at 18:00

Most active fund managers run big portfolios which mean they are chasing Beta and doing so at your expense. Most fund managers undeperform their chosen benchmark.

Dumb is young and can afford to take risks. Investing in individual shares is high risk but returns can be better and you learn more. If you want some exposure to international quality big caps put 30% in Fundsmith (low charges, concentrated holdings, exposure to high profit margin and high return on capital international companies) and keep 70% invested in individual stocks. Don't bother about allocation, diversification blah blah. Instead, look for a few great companies which can make a difference to your portfolio. A pure Alpha approach makes sense when you are young. You end up becoming a better investor when you make the calls and have your neck on the line.

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Suze Jamieson

Nov 26, 2012 at 18:08

Agree with Mike. That said, like me, DI clearly has itchy fingers, as well as a need for subject matter for a column. My own strategy is to allocate in the usual sensible fashion with a mix of investment vehicles designed to keep costs low without cutting the potential for outperformance (roughly 60% ETFs, 20% ITs and 15% OEICS). But I keep back 5% for scratching the itch... which means I have a bit of ready cash to try out a new fund for a few months, pick up a cheap share (like Standard Chartered when it dropped) or add weight to a particular sector when it's top of the pops. With only 10k to start with though, I think DI is stuffed, unless he's willing to start spread-betting with c £200...

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Jeremy Bosk

Nov 26, 2012 at 19:22

You get 90 per cent of the benefits of diversification with only ten holdings. Adding to the number increases costs faster than it reduces risk. There is also the time factor. Does a non-professional investor really have the time to track 20 holdings properly and do the due diligence on replacements as you sell the losers? Thorough research into individual stocks reduces risk just as much as diversification.

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richard hickman

Dec 02, 2012 at 09:09

You cannot look at asset allocation without considering all your assets, your house, your pension, your savings, your self managed portfolio. Then what does your allocation look like. Possibly 10% of the lot is the portfolio you are currently worried about allocating. All the rest is being managed for you, so use the portfolio for more speculative 'fun'

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Peter H

Dec 02, 2012 at 23:11

I would have thought that Dumb actually hasn't done such a bad job of diversification. 5 out of 7 holdings are investment trusts/funds, and so will have about 100 holdings each: that's 500 companies! and he has global spread. Standard Chartered is a single co., but is diversified by banking in different counties and with a range of clients in these companies. Cash is part of 'asset allocation', and doesn't need to be invested; it doesn't go down quite like equities can! Personal Assets Trust actually has about 50% in 'cash equivalents' (govt bonds, gold etc) and they are quite good at 'asset allocation'

BP could be sold (15% stop loss principle) and single co., and US and Russian troubles. A US etf ,eg a NASDAQ tracker could be bought. Just sit on these for 5 years to see the results!! Just my personal views. Peter

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