Aspiring Investor asked me about my asset allocation. It's a good question given that the asset allocation process has been shown to be a material factor in portfolio returns.
For better or for worse, I do not follow a traditional asset allocation model such as (X% in stocks, Y% in bonds or the well debated permanent portfolio.
Prefer cash flow producing risk assets: I am primarily a value investor with a tolerance for market volatility and a belief that continued inflation is more likely than deflation over the longer term. To that end, I prefer to have most of my savings invested in risk assets (real estate and stocks) that produce cash flows (rents and dividends) that have at least the potential to increase over time to more or less compensate for the effects of inflation. Relying on cash flows to pay our living expenses also reduces our need to time the sale of assets to maintain our lifestyle.
Currency matching: Further, I would prefer to have a significant part of those cash flows denominated in the same currencies as our expenses: mostly HKD and NZD with others depending on where we go for holidays. As a result, most of our assets are either Hong Kong property or securities listed on the Hong Kong Stock Exchange.
Cash reserves: Cash flows can get disrupted. Dividends can get cut. Properties can remain vacant (which is a real pain as outgoings like rates and mortgage payments don't stop). History tells us that such disruptions are more likely to occur at times when asset prices are low. I don't want to be forced to sell assets at unfavourable prices - especially after I have retired and no longer have employment income to fall back on. Accordingly, I intend to maintain at least two years worth of living expenses in cash or short term bonds that I can draw on if needed.
Some diversification: Lastly, I also recognise that having the biggest part of our assets weighted towards HK/China is a risk factor in itself. With this in mind, we are allocating some more of our savings to investments which are either (i) outside HK/China and (ii) in different asset classes. As an example, I recently unsuccessfully bid on another property in New Zealand, we have some exposure to gold and silver, we have invested in some ETFs which invest outside HK/China and allocated a small amount of money with Walton. Since I do not want to work for another five years or more, the allocation to these non-core assets is, of necessity, quite small
Estate planning: As a final point, we have avoided accumulating significant assets in countries which impose estate duties. Our investments in the US and the UK are limited as a result. Hong Kong and New Zealand do not impose estate duty.
Summary: In summary:
(i) mostly Hong Kong real estate and listed securities held for cash flow to fund daily living expenses;
(ii) a material allocation to New Zealand real estate and listed securities held for cash flow to cover daily living expenses while in New Zealand;
(iii) smaller allocations to other assets including ETFs, gold, wine and other investments to provide a degree of diversification; and
(iv) at least two years worth of expenses in cash or near cash to cover any disruptions to cash flow (and a willingness to hold considerably more in cash/near cash if suitable investments cannot be identified).