Asset Allocation

I track our asset allocation usually monthly. As said in the previous post, I have heavily increased our allocation to selected IT stocks this year. Therefore, I thought that it is good time to writen an update on where I believe our money will give the best returns given our time horizon and risk profile.


Asset Allocation

Stocks 91%
Gold 9%
Cash -
Bonds -

This kind of allocation means
1. our investment time horizon is decades long (hence my pseudonym "UltraLong" :-)
2. we accept high risk (high volatility)

If you are not familiar with asset allocation, then I recommend reading about it. For example, "Beginners' Guide to Asset Allocation, Diversification, and Rebalancing" by U.S Securities and Exchange Commission.

The basic guides do not talk about gold. However, you can think it as cash that in long run will hold its value better than any other currency. Gold does not yield anything, but it should offset inflation in long run. It is also a hedge for very bad times. You can find more about Gold as portfolio diversificator from e.g. World Gold Council web pages. Gold has low correlation to many other asset classes. The correlation is especially low to stock indexes. Therefore, it makes good hedge and diversificator for a portfolio such as ours. However, you should be aware that our allocation to gold is a lot higher than recommended in several studies about asset allocation that I have seen. On the other hand, omitting cash and bonds is also against all rules of "safe" or "optimal" asset allocation.

I omit cash and cash-equivalents because the real returns (real = after inflation) there are typically negative or nonexistent. Also, we have hopefully long work careers ahead of us meaning we can continue to save for a long time still. This means our current investments represent only a fraction of our cumulative earnings between the day we started working and the day we retire.

I have to admit I haven't really studied bond investing that much. I know the basics and the fact that with ETFs and mutual funds you can invest quite easily to bond market and achieve diversification at the same time. If I would invest into bonds, I would probably go for corporate bonds. However, I prefer to be owner of companies rather than a creditor for the following reasons:

• I don't believe that we are going to have decades long deflationary spiral in the western world. I rather believe authorities will do everything they can do avoid this and cause inflation.
• Inflating debt away is the oldest trick in the book for countries with own central bank
• Yeilds are at all time low. When they finally go up, bond values go down. Even if you are holding to maturity you may have poor yield vs. inflation or alternative investments.
• Stocks are beaten so low that the yields are very attractive vs. bonds. Corporations with adequate pricing power can raise prices with inflation and as a bonus they might even grow.

Stock Allocation

Geographically our allocation is

• Europe 43%
• North America 39%
• Emerging Markets 17%

Sector allocation

• Information Technology 33%
• Communication Service Providers 18%
• Health Care 12%
• Oil & Gas Production 11%
• Low Emission Power Generation 9%
• Mining & Exploration 7%
• Other 9%

Since we own gold miners our combined allocation to gold and gold mining is 14,4% of all assets.


Our Top 5 holdings are at the time of writing (percentage marks "out of all assets"):

• Nokia 7,8%
• China Mobile 6,6%
• Western Digital 6,1%
• Intel 5,7%
• Microsoft 5,7%

Please check "Note about risk profile" from the sidebar to understand better why we can take a lot more risk than what is recommended even for professional investors.

Portfolio update

In the past month I have been making some changes to our portfolio. I have sold shares in AstraZeneca and Lithium ETF. I wanted to increase our allocation to Information Technology sector and some other sectors needed to be pruned. This leaves 21 companies and 1 ETF to keep track of. That's plenty for me.

Our sector allocation has now tilted quite heavily to Information Technology, which has by far the largest allocation (29%). Other sectors are close to 10-15% range. It is good to note that I follow quite closely what famous value investors are doing. According to Dataroma they are also exposed to IT sector although they do seem to love financials even more. Currently our allocation to that sector is zero.

Microsoft and Cisco Systems are among the Top 10 most owned stocks, but they haven't been adding to those positions lately. Rather they have been going after Oracle, Google, Apple and HP in the last 6 months. Overall, the big companies in IT sector seem to attract value investors and I do agree with them that there is indeed value to be found from many companies in that sector.

When the Euro crisis will end?

Not a day goes by that something is written about the "Euro crisis" in newspapers. Now it seems that Spain is joining Portugal, Ireland and Greece to ask for some sort of emergency funding. There seems to be speculation about the amount of money needed between tens of billions and 100 billion euros. Anyway - lot's of money.

I have lost track of all the "facilities" through which funds are directed to the countries in need. Also, it seems that there is a dangerous pattern of declaring "emergency over" after "stress tests" or simply spending XX billions on the problem. The confidence isn't just quite restored yet. I have no idea when it will be and have come to a conclusion that probably nobody knows fully what is ahead of us.

Greece started the show in 2010 with getting emergency funding worth 45 billion euros in March and additional 110 billion in May. Ireland followed with 67,5 billion euros late 2010 and then Portugal got 78 billion euros in May 2011. Last summer Greece came once more back and total funding to that direction has ballooned to 285 billion euros. So there is already one example of a country coming back for more.

Thus, it's a bit hard to believe 100 billion is going to solve all of the problems in Spain - a much bigger country in terms of population and economy than Greece. The s**t will really hit the fan if Italy comes in and completes the pejorative acronym "PIIGS" used by many to reference these countries.

Our defensive posture with regards to portfolio allocation looks better every day.


Source for emergency loan figures and timing: Helsingin Sanomat 9th of June 2012

About the Importance of Gardening

"There's nothing more important than gardening and even that isn't so important" - Chinese proverb

If you have a garden - small or large - you need to take care of it or have someone do it for you. Otherwise it does not take long for that garden to loose its beauty. You need to walk there and observe. You need to pick up fallen tree branches, take out the weed that contend with those nice flowers you have planted and so on.

Managing stock portfolio is much like managing a garden. You should review your porfolio at least once a year if not more often. When I look at companies in our portfolio, I ask myself that would our money yield better somewhere else. Also, I take care that there is enough variety and number of different stocks (diversification).

Selling is much more harder than buying. It is actually good because excessive trading causes most likely just expenses. It try to keep our taxable profits at minimum because we have 30% tax for capital gains in Finland. Therefore, at year end it is good to review the situation and consider taking tactical losses if possible*. Having even net loss is not that bad because it can be used to offset gains in taxation for the next five years in Finland. This might sound strange, but my goal is really to keep the snowball rolling with minimum interference.

*Whether you can do this without it being interpreted as tax avoidance depends on where you live. In Finland there are certain rules that you should follow. For example, I have understood that to be on the safe side you should not buy back the stock the same day you sold it.

Sold Talvivaara and BYD

Time for filing annual tax returns. In 2011 we sold more stocks at a loss than at a gain. Overall we posted a small net loss. Most of losses in recent years have come from Nokia, Talvivaara and BYD. Selling at a loss is always very hard to do.

I decided that we should exit completely from Talvivaara and BYD. The remaining positions were too small to make any difference in the portfolio and on the other hand I feel Nokia has best chances for turnaround out of these three. So all chips in the "turnaround" category will go to Nokia.