One of the fundamental truths of being a personal finance blogger is that it invariably involves telling readers what you think.
The internet, however, is a funny, opaque place.
Things are not always what they seem. And for all you know, I could be just a random hobo sitting in the middle of nowhere, simply pretending to be an investment banker.
Of course, that would be an informational asymmetry of the highest order, and sadly I’ve got neither the writing skills nor the imagination (or the time) to pull something this complicated off.
But the informational asymmetry doesn’t end there, especially in the personal finance space.
Sometimes it’s intentionally misleading. Cue in that Twitter money bro trying to sell you a stock trading course. Guaranteed money maker, just $99, limited time only!
On other occasions, there are other, more benign reasons why one’s advice may differ from his or her actions.
And there’s nothing like observing revealed preferences to bridge the gap between imagination and reality.
Nassim Taleb once said: “Don’t tell me what you think, tell me what you have in your portfolio”.
Thus, in the spirit of full transparency (and also because some readers have asked), I’ve decided to do a post outlining my own asset allocation.
Am I really such a big believer in passive investing and real estate? Or have I been leading you down the garden path all along?
You’re about to find out.
Rules Of The Road
Some folks are more than happy to lift their personal finance kimono all the way up, for everyone on the internet to see.
I am not one of them. Hence, a few guiding principles/observations:
- For ease of reference, I have pro-rated all of my holdings to $1m
- Yes, I think in dollars. Tough to shake off the legacy of Uncle Sam having spent a big chunk of my life across the pond
- For confidentiality, I will not be disclosing my two individual stock holdings. Investment banking is not as big an industry as some might think
To start off with, here’s a snapshot of my portfolio by asset class, as of November 2020:
Nope, turns out I didn’t lie to you (not yet anyway).
Equities are the biggest component, accounting for 45% of my portfolio.
Real estate currently represents just under a quarter.
Note that this is property value net of mortgages – representing just our family’s equity stake in the properties that we own.
What this means is that the risk of loss on our property investments is higher than 23%.
Purely theoretically, if property values were to decline significantly, our equity stake would be wiped out – and I would still have the liability. It’s a remote outcome but it has happened before.
Cash Is… King?
You will also have noticed that I am sitting on far more cash at the moment than I should be, by any objective measure.
Currently, cash represents c.31% of our portfolio. It is my sincere hope that the cash pile gets even larger come Q1 2021 when the next batch of bonuses is due to be announced and paid.
There are three reasons why our family’s cash holdings are at this level:
Reason #1: We are currently looking to acquire even more real estate
Ideally, we would look to buy another two commercial properties in 2021 and another one the following year.
As I have written about previously, the challenge with real estate investing is that you never know when the next deal will come along and how expensive it might be.
Thus, it invariably leads to a suboptimal asset allocation until you deploy your capital.
The implied opportunity cost is the one factor that many folks forget to account for when considering property investing.
Reason #2: We are now at risk of hitting our pensions LTA
Over the years, we’ve been pretty aggressive about contributing to our pensions. Those attractive workplace pension returns may have something to do with it.
Rate of return on your workplace pension:
As my earnings grew, I ended up being tapered down to £4k. In order to tame the taper, we’ve started overcontributing to my wife’s pension.
We are now at a point where the prospect of exceeding the LTA is becoming more likely by the day.
Thus, we have reduced my wife’s contributions as well and are now switching from pension to ISAs. As such, there’s a bit of a lag until we can make use of next year’s ISA allowance.
Reason #3: My job
Sad but true. I am acutely aware of how unpredictable my job is. Thus, we keep an emergency fund equal to 12+ months of our spending.
The opportunity cost is pretty meaningful – but the ability to sleep well at night is priceless.
To sum it up, I am planning to take our cash holdings to c.5-10% of our portfolio, but I won’t plunge into a bad real estate deal in order to do that.
Breakdown Of Equity Holdings
Let’s now have a look at what’s inside my equity portfolio to see if I actually practice what I preach.
North American Equity Tracker: 33%
This comprises mine and my wife’s workplace pension plans, or rather, the portion not yet transferred to a SIPP.
Sadly, I’m on one of those crappy plans with high fees. But given a £4k annual contribution (and a transfer out every 12 months), it’s not so bad.
On the contrary, my wife’s pension provider is actually quite straight up and provides a good range of low-cost index trackers.
Either way, both are about to be transferred out to a third-party pension provider shortly after Christmas, most likely Hargreaves Lansdown.
S&P 500 Index Tracker: 15%
This one speaks for itself. Held in our ISAs, VUSA is the Vanguard S&P 500 ETF.
At a 0.07% ongoing charge, what’s not to like?
The difference between VUSA and the North American equities above is that the latter holds a broad universe of US stocks beyond those in the S&P 500.
US Small Cap Equities: 30%
I’ve previously written about my dangerous liaison with value stocks.
As it happens, I’ve gotten even friskier with small-cap stocks. At roughly a third of my equity portfolio, small caps (I hold them through the IJR ETF) represent a pretty concentrated bet on a specific sector.
Why do I do this to myself?
Well, for one, I’ve made up my mind on the Fama-French theory. Having taken a view, I intend to stick to it for at least a few decades.
The second reason is that the small caps are quite complementary to my S&P 500 holdings. If you add the two up, I basically end up holding the entire US index.
And the third reason is that when I was buying up equities earlier this year, the S&P 500 had already recovered most of its losses.
On the contrary, small caps and value stocks were still relatively underpriced back then.
US Value Stocks: 16%
See above. Incidentally, right after I’ve reflected on the destruction of value, we’ve seen a monster rally in both value AND small-cap stocks.
Given I’ve got a 20+ investment horizon, I’ve ignored the recent moves. Only time will tell how successful my strategy has been.
My US value stocks are held through the IWN index.
Bank Stock #1 & #2: 9% combined
These are the shares me and my wife have been awarded in our respective employers.
Normally, my policy is to liquidate my share awards as soon as they vest. However, this year I’ve made an exception.
Bank stocks have plummeted back in March and stayed there for most of the year.
It simply didn’t make sense to sell our holdings at a 50% discount just to buy the S&P which by that point had almost recovered its losses.
On the back of brighter macro prospects, our employers’ share prices are up meaningfully as I write these words. Come spring next year, I will likely monetize our entire holdings (another portion will have vested by then).
To sum it up, I probably didn’t do too bad on the polygraph test.
My strong preference for US equities and real estate (but only outside the UK) is reflected in my holdings.
Perhaps I’ve got a bit more of an active streak in me than I like to admit, as evidenced by my bias towards small-cap and value stocks.
In my defense, I do hold them through widely diversified ETFs.
And the reason I don’t recommend other readers get into these subsectors is that I think there is probably an easier (and cheaper) way to get an adrenaline shot out there.
Either way, I’ll keep you posted.
Thank you for reading!