My Personal Asset Allocation
In his book Skin in the Game, Nassim Nicholas Taleb was able to boil down several financial comments in one sentence: “Don’t tell me what you think, tell me what you have in your portfolio”. This canny comment has strongly inspired the launch of this article – My Investment Portfolio – where I will dive into my Overall Asset Allocation.
This approach will provide a concrete set of examples from my investment records. While I rely on timeless, universal principles for my Investments, their specific execution is based on my personal needs, goals, strategy and risk appetite (Are You Risk Averse? Professor Damodaran Video). Therefore, you can use these references and benchmarks for education purposes but not as guidelines to “clone”. The same goes for other articles I published on Portfolio allocation:
If you are looking for a road map for your personal finances and investment decisions, it must be customised for your unique circumstances.
Personal Assets: the building blocks of an Investment Portfolio
Personal Assets are the building blocks of an Investment Portfolio or, stated differently, an Investment Portfolio is a sub-account of Personal Assets. To correctly design an Investment Portfolio (risk profile, diversification, liquidity, asset allocation), looking at your overall Net Worth and list of Assets outside your investment portfolio is necessary. The underlying logic is that by wisely managing Personal Assets, we can allocate enough resources to an Investment Portfolio.
Definition of Personal Assets
- Personal Assets include cash items, personal possessions (collectables, vehicles, etc.), fixed assets (real estate) and investments.
- Personal Assets are accounted at their Net Value by deducting any liability (debt).
- Personal Assets should also be accounted for conservatively, considering the real cash equivalent we would receive by liquidating them within 1-3 months (your favourite painting, gadget, collectable, guitar, bike or carpet might NOT value as much as your think!).
- The total value of Personal Assets equals the Net Worth: the total value of Assets owned. For a “how-to-do” guide, refer to my article on how to calculate my Net Worth.
My Personal Asset Allocation, as per Graph’s breakdown
Let’s comment on the structure of my Personal Asset Allocation:
A) Personal possessions (furniture, equipment, clothes, electronics, vehicles, etc.).
– It is 2% of my Assets. Not that much.
– Although I own a lot of “stuff”, most items over time tend to have a limited residual value (scrap value) and/or hardly have a second-hand market (difficult to resell).
– The value of personal possessions has been conservatively estimated, taking into account its depreciation; I have used the same approach applied by banks to assess the value of collaterals.
– It is my approach to be slightly minimalist and try to afford anything but not everything. I have key “strategic” quality items I love and other more practical possessions. I care about my stuff, and to a good extent, it is quality stuff. Still, I know it has decreasing economic value.
– I am not into collectables. I try to stay away from that rabbit hole, both from an investment and lifestyle point of view. Collectables are not suitable financial investments (beyond returns). I think collectables have a dark psychological side (a mix of dangerous nostalgia and consumerism). Still, we all need hobbies and playgrounds to each our own 🙂
B) Cash Assets (emergency fund, current account, medium-term-saving)
it is 14% of my Assets, relatively high for my standards. Although I tend to “sweat” my assets as much as possible by giving every dollar a job, I chose to keep a higher amount of cash uninvested due to the following reasons:
My golden rule for cash liquidity is the following:
– keep enough cash in the current account for my monthly transactions (mainly using debit cards).
– keep enough cash to cover six months of running costs in case of business challenges, cash flow/liquidity problems, etc.
A good reference on how to allocate cash, savings and investments comes from the “bucket approach (video)” made famous by Harold Evensky, which suggests one money bucket for running costs, one for emergencies, and one for short-term investment (10 years) and one for long-term investments (retirement).
C) Real Estate Investments
It is around 35% of my total Assets. R.E. is an essential part of my investment diversification strategy. It is made of
C1) fixed assets (apartment units), and
C2) real estate investments in the form of REITs, Development Loans (P2P) or Equity shares (crowdfunding). These additional investments fall under other investment buckets (Capital markets, P2P lending and crowd investing). With the only expectation of REITs, the other R.E. products are highly illiquid. Therefore, it is something to consider and keep in mind.
Investing in Real Estate has been a hot topic, particularly in the last 15 years, due to the dramatic real estate bubble of 2007/2008 in the US, whose sub-prime financial crisis spread like wildfire worldwide.
There is a heated debate over including your “home” in your Asset Portfolio. Technically, it is part of your Network, and it is part of your total assets. However, it is plausible not to include it in your Investment Assets because it is not a productive asset. It is a lifestyle purchase, a conservative and solid financial decision to own your house (you don’t pay rent).
However, it is not by itself an investment. For instance, if your home is 90% of your assets, you have locked all your financial resources into your lifestyle. No judgment here. If it gives joy, security and satisfaction, that’s great (Maslow’s Pyramid of Needs). To a certain extent, it is a way to “save money” and store wealth. However, your home is hardly an investment.
You might have overpaid it because you liked it. You might have overpaid it because there were few options, or it was a R.E. bubble. It is an extremely illiquid asset. It is a highly concentrated allocation of resources (no diversification). The fact that it might appreciate over time can be a reasonable assumption (to be vigorously tested).
However, I agree that if the bulk of your Net Worth is your house, it misleads your real financial outlook and analysis for financial independence. As such, it could make sense to remove it from your investment portfolio assets.
D) Pure Financial Investments
– Financial Investments represent almost 50% of my total Assets.
– They include classic Investments in the Capital Market (Equity, Bonds, REITs, ETFs) and other alternative investments such as P2P lending and equity crowdlending. Part of these investments uses Impact Investment Platforms that equally focus on positive financial, social and environmental outcomes.
The Investment Platform I use – The Tools
The Fintech revolution has democratised and improved Access to Financial and Investment Services worldwide. Depending on where you live, you can access various Investment services that meet your investment profile and strategy. While I Invest in Real Estate, P2P lending and Crowd Investing platform, most of my portfolio is invested in the Capital Markets. I believe it is the greatest and most effective instrument for individual investors’ long-term wealth-building.
Final Notes on My Personal Asset Allocation
- Whenever possible, I buy “stuff” that brings (practical or emotional) value and/or has limited depreciation.
- I intentionally select investments using different financial vehicles and asset classes (diversification is key).
- I always make sure to have a % of Impact Investment products in my Portfolio.
- I am satisfied with my strategic asset allocation at this stage: it aligns with my overall strategy and most effective tactics. Such asset allocation and use of different investment vehicles have been stable over the last four years (2019-2022).
- I have only taken minor tactical decisions based on market opportunities. Every time I have the chance to invest more savings, I buy specific products to re-align the portfolio, eventually buying more products that are temporarily under their intrinsic value/underpriced. Sometimes, I also reallocate based on the % of liquid assets I feel comfortable with (Real Estate, P2P and crowdfunding are not liquid investments).
- In upcoming articles, I will list the exact financial products in my portfolio (ETFs, REITS, P2P, etc.)
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