Thursday, January 18, 2007

My Asset Allocation - A Change In Strategy?

At the end of 2006 our asset allocation was as follows:

1. Hong Kong Real Estate: 63.6%
2. Overseas Real Estate: 10.1%
3. Managed Funds: 14.7%
4. Direct Equities: 5.0%
5. Cash and Cash Equivalents: 5.0%
6. Other Investments: 1.7%

The "Other Investments" are my paper silver.

This is not exactly a model portfolio. We are clearly overweight property and underweight equities.

Our financial plan aims to derive roughly half our retirement income from rental properties and half from dividends on equities. The original intention was to acquire the required number of properties as quickly as possible. The rental income would then be used to pay the mortgages off while savings from our jobs would be used to build the equity portfolio.

After spending some time educating myself on the importance of asset allocation, I am considering directing a greater portion of our savings to managed funds now. The additional properties will still need to be acquired, but the acquisition would be delayed until an indefinite time in the future. The advantages of delaying acquisition are:

A. I am finding it difficult to identify properties that show an adequate yield (after expected vacancies, rates, management fees and other outgoings). By delaying the acquisition of the balance of the properties, I give the market more time to generate better opportunities;

B. I achieve a better asset allocation in the shorter term. In 2006 the returns on our investments as a whole, while good, would have been even better with greater exposure to equities. I am trying hard to ignore the effect which greater allocation to equities would have had on our 2006 returns - I do not want to end up in a position where I am effectively chasing last year's top performers (historically this has been a bad strategy);

C. My debt levels will be kept lower. I will only be taking on debt if I buy additional properties. At the same time, all our mortgages except one are on principle and interest terms so the amount of existing debt is being reduced each month. As much as I like debt as a tool to enhance returns, I look forward to the day when we have no borrowings at all.

The only downside to delaying the purchase of the additional properties is that he delay will mean that there is less time to pay off the mortgages used to acquire them before I retire.


L. Marie Joseph said...

I look forward to the day when we have no borrowings at all.

Don't we all. I see a huge amount is tied up in Real Estate. It's time to diversify.

I am considering directing a greater portion of our savings to managed funds now.

I agree.

since real estate is "paper wealth" it's best to point towards equities.

traineeinvestor said...

Thanks for the feedback.

Definitely time to increase the exposure to assets other than real estate.

One query: why do you say that real estate is "paper wealth"? The properties are physical assets (and I have the repair bills to show for it) and produce real rental income.