The starting point of every portfolio is asset allocation, e.g. in what asset classes to invest. This is the easiest and the most difficult part of investing at the same time. Easy because technically it means define how much money to put in what asset class, difficult because it means address your goals, your risk tolerance and your investment horizon, focusing on risk, cost, time and behavior and not on returns as described in this picture Vishal Khandelwal found on Twitter/X.
Many (young) investors don’t seem to care or even don’t know what asset allocation is, mainly because financial industry is incentivized by selling products and therefore focus on products be it funds, ETFs or life insurance.
My asset allocation is strategic and not tactic so:
the portfolio should be broadly diversified across and within asset classes
has fixed allocations rebalanced periodocally: they may change in time based on age but not based on tactical considerations. I know that i’m a bad market timer like 99,9% of market participants. Time in the market beats timing the market
aims at getting exposure to asset classes so that the whole portfolio has expected drawdowns and drawdown durations I can live with
That said my target allocation is basically inspired by David Swensen 1 and at the time of writing is:
60% stocks
20% bonds
5% gold
5% commodities
10% “alternatives”
In the next posts I will focus on the single asset classes and how I manage liquidity.
David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment