My New Asset Allocation (Part XIV)

Yes, that’s right – after reading countless books and posts about asset allocation and writing several convoluted and contradictory posts on the topic myself, I’ve finally decided on an asset allocation model for our investments. The problem with asset allocation is that there is a lot of theory behind various models and the more you know about the subject then the more confused you will probably get. I’ve concluded recently that maybe just picking a simpler asset allocation is probably the best approach since I’m not sure how much it really matters what your exact asset allocation is, as long as you pick one and stick with it.

And now (drum roll please..) on with the allocation!

Equities vs Bonds

The split will be 75% equities and 25% bonds. I like to have a fairly aggressive portfolio but at the same time the bonds will steady the returns and will also allow for more equity purchases in case the equity markets go off a cliff. According to Mr. Bernstein, 75% equity gives you the maximum benefit from owning equities.

Equities 75%

These percentages are of the equity portion (not percentage of the total portfolio).

Canadian equity – 25%

US equity – 37.5%

International equity – 37.5%

Bonds – 25%

20% is a short term Canadian bond ETF (iShares XSB) and some GICs.

5% is a real return bond ETF (iShares XRB). Real return bonds are a hedge against inflation and are supposed to be negatively correlated with regular bonds.

Other asset classes?

What about real estate and emerging markets? I’ve decided not to invest in those right now because both of these classes have done so well in the past several years that it’s hard for me to justify buying them. I’m also not convinced that emerging markets are all that great an investment. When you consider the exposure that a lot of North American companies have to developing markets, I already have enough emerging market in my portfolio.

Anybody want to share their asset allocation philosophies?

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