Optimal Portfolio Allocations

Very interesting post above @Marsares thanks - would you be able to point the non-expert reader at anything that unpacks this a bit more? I ask because most of what I’ve read about asset allocation seems to still take 60/40 (or variants, 80/20 and so on) as foundational.

60% equity / 40% bond is still the norm for the retail investor, partially because its been the norm for so long and advisors and retail investors themselves have grown up with this as it has stood the test of time.

But also perhaps because alternatives are much more difficult to access for retail investors than it is for institutional ones. Institutions typically lead the way though, and in years to come I suspect alternatives will become much easier accessible and portfolio allocations for retail investors will shift as a result.

There’s an “all weather” portfolio by Ray Dalio, which he revealed in Tony Robbins’ Money book. I don’t follow the strategy though (yet) but it appears that he may have been “right” more often than “wrong” as he’s consistently delivered returns over the years - especially in times like today:

CNBC:

A typical portfolio might be split between 50 percent bonds and 50 percent stocks, but Dalio argues that isn’t really diversified in “Money: Master the Game” by Tony Robbins.

“When you look at most portfolios, they have a very strong bias to do well in good times and bad in bad times,” Dalio says in the book. To avoid your portfolio simply rising and falling with the market, his advice is to spread out and balance the risks of each investment.

Here’s his breakdown for what a well-diversified portfolio might look like, according to the book: 30 percent allocated to stocks, 40 percent to long-term U.S. bonds, 15 percent to intermediate U.S. bonds, 7.5 percent to gold and 7.5 percent to other commodities. (The portfolio does need to be rebalanced annually, he adds.)

This comes from:

He’s got access to to the bond and commodities markets while retail investors may have to use proxies, that follow them closely. Not sure here.

This is not an investment advice.

This is a book reading advice. That book where the portfolio was revealed is one of the best investments and it costs less than £10. It’s a long read though. The guy interviewed billionaire investors because he himself is a billionaire and is good friends with some of them. He coaches some of them. The 2008 crisis and the aftermath were some of the reasons why he wrote the book for the masses.

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Thank you all for the above recommendations, I’m much happier with where things are at right now with my portfolio.

Thanks for this great post. Do you have a link for these asset allocations?

  • 1997 60% equity, 35% bonds and 5% alternatives
  • 2016 split of 48/28/24%

Is there a website where this is discussed with years and concrete numbers like yours? I would be keen to see this gradual change over the decades.

There is a great playlist from MIT’s Andrew Lo where he sits down with all the greats in finance to discuss the perfect portfolio, definitely worth a watch.

Link to interview playlist:

Great summary! At the end of the day there’s no such thing as an ‘optimal’ portfolio allocation as it depends on market characteristics at a point in time as well as personal circumstances

I have come to realise that the UK does not have an investment platform that allows you to select your funds & allocation percentage with a simple slider option - then set up regular payments hassle free.

You have platforms which offer OEIC funds & trackers for only the platforms yearly cost but £11.99 share & etf fees and no regular payment schemes which make sense for £250 pm.

You have platforms which offer free-trading but zero regular allocation tools.

You have a platform which offers free-trading with allocation tools but no access to low cost OEIC funds etc…

You have platforms which have selected your investments for you that you can not alter yourself.

Its been years and still no real breakthrough in the UK to personal allocation tools. Regular direct debits… Simple portfolio allocation.

Its reeeeeaaaaaaalllllllyyyy tough to set and forget and I thought this would have been addressed by now…

There aren’t sliders but plenty of the traditional platforms will let you set up monthly buys of funds based on predetermined percentages.

I had an ISA account with Charles Stanley Direct and I did just that, I haven’t used it on my HL account but I assume that does does offer it as well.

@adam has said a few time that this feature will be coming, called autopilot. It was planned but it looks like it had been put in the back burner in favour of EU expansion. For it to work to its best potential UK fractional shares would be needed.

It fits perfectly into the FT ethos of long term relationships with this customers and encouraging regular steady investing.

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I would like some feedback on my portfolio and investing strategy. I have been investing for about 2 months with Freetrade.

I would say my main strategy is investing in ETFs and only investing in individual stocks if I understand them very well. I personally do not believe in needing to diversify, if you buy a few good businesses then there’s no need to diversify, if you’re investing in the long term.

I have only invested in Microsoft and Tech ETFs, and would invest about £250 each month. I’m a software developer, and tech is the only thing I understand very well and that’s why I chose to aggressively invest in it. I also plan on expanding and investing in more ETFs in the future, but right now these two are the only ones I’m comfortable in

What are some of your thoughts on my thought process and strategy. Is it flawed? Anywhere you think I could improve on?

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40% of IITU is comprised of Apple and Microsoft ( 20% each ) so there’s some crossover with your Microsoft holding.

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wouldn’t say it’s a bad thing, but you have more exposure to MSFT, so if something was to go tits up, it would hurt both your positions

That’s a good point. Is the crossover a bad thing? Does it mean my portfolio is inefficient?

That’s true, but I doubt it would with Microsoft currently. Microsoft may go tits up in the short term, but long term I think they’ll be fine.

MSFT a hold for life I think…especially with their research into printing data on to glass.

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I agree. I saw that and I think it’s amazing what they’ve been able to achieve. Also if that glass technology gets better, it would further improve their cloud service Azure.

Historical wisdom has it that you should pick at least 30 stocks for a decently diversified portfolio.

In 1970, Lawrence Fisher and James H. Lorie released "Some Studies of Variability of Returns on Investments In Common Stocks“ published in The Journal Of Business on the “reduction of return scattering” as a result of the number of stocks in a portfolio. They found that a randomly created portfolio of 32 stocks could reduce the distribution by 95%, compared to a portfolio of the entire New York Stock Exchange.

If you primarily invest in ETFs, like you, you can capture meaningful exposure to the entire global market portfolio with as few as 12 ETFs and/ or mutuals and do so at a relatively low total portfolio cost.

I do worry about you being overexposed to the tech sector. For a well balanced portfolio you must cut across the dimensions and styles of a company like large/small, growth/value, foreign/domestic, as well as the various geographies.

At the end of the day, the degree of diversification is largely driven by your risk appetite and conviction. If you believe that tech is to outperform most others, and you can accept a potential disproportionate fall during a downturn, then go for it.

If not, you may wish some more diversification, especially since you are not a professional investor, and even for the professionals it’s near impossible to continually outperform the market through active investment management.

Personally I invest mostly in ETFs and ensure I have a good spread across company size, growth, geography and industries, with 20% of my future portfolios in single stocks where I have a high conviction on long term bets. However, I do also see that 20% as “play money” that I can afford to lose.

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Buffet promotes the ides that there is no need to diversify if you invest in good stocks which is why last year he had around 1/3 in Apple. I respectfully disagree for 3 or 4 reasons:

  1. you average investor is not Warren Buffet
    And their access to new information is likely to be very slow and they do not have his ability.
  2. Billionaires can play with millions. You have 1,000. If you have assets of 100k I’m not too worried, though any success and you’ll just invest more like this until it bites.
  3. Nearly every company has its life. One day microsoft shares will slump and die. Maybe not in your lifetime.
  4. if the top shareholders and especially the board sell off, the share price will crash. There doesnt need to be anything wrong. Your reasoning for investing remains the same. But you will wonder what you did wrong. The answer will be that you had too much in one stock. Always diversify
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IITU is an interesting twist on US Tech ETFs - no Alphabet / Facebook and Visa / MasterCard included in their Top 10:

Security Weight
APPLE INC 19.68%
MICROSOFT CORP 19.34%
VISA INC 5.18%
MASTERCARD INC 4.27%
INTEL CORP 4.19%
CISCO SYSTEMS INC 3.27%
ADOBE INC 2.57%
SALESFORCE INC 2.32%
NVIDIA CORP 2.32%
ACCENTURE 2.15%