Asset Allocation - update

Back in January 2007 I reviewed our asset allocation in light of our retirement plan and concluded that (i) we were heavily overweight Hong Kong real estate and (ii) that the overallocation was in line with our retirement planning but (iii) greater diversification would be beneficial. At the time we had 73.7% of our household net worth invested in Hong Kong real estate.

Our current asset allocation is:

Home: 6.05%
Hong Kong investment properties: 38.64%
Overseas investment properties: 6.28%
Managed funds: 18.62%
Direct equities: 11.28%
Commodities: 1.6%
Cash and bonds: 17.53%

These numbers are calculated on a net basis - that is they reflect the amount of equity invested in a property at current mortgagee valuations rather than the total value of the property. The cash and bonds category is temporarily inflated as some of it will be invested in my employer's business next month and a bit misleading as it includes my ELDs and CLDs. The reality is that we are not holding much cash at the moment.

In any event, since January 2007 although we have added to the property portfolio, we diverted more of our income to other asset classes (managed funds and direct equities). While the timing was awful (too many funds were purchased near the market peak - we would have been better off buying another property), subsequent purchases starting in October 2008 have done extremely well.

In terms of our retirement plan to derive about half of our income from rent on properties and half from dividends on shares, because of the gearing effect we need to add more to the equities asset class than the real estate asset class. That said, the ELDs and CLDs have shown good returns this year and a good case for permanent allocation to these instruments can be made.

I have no particular views on what is the correct asset allocation for us at this time - or even whether there is a correct asset allocation at all. If I can identify properties which can be purchased at prices which provide an acceptable yield (very difficult in the current bull market), I would add to the property portfolio. Absent such opportunities, I am happy to add to the equity allocation or simply do more ELDs and CLDs.