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.