Wednesday, August 22, 2007

Asset Allocation - August 2007

It has been about two months since I last wrote about our asset allocation, so I figure it's time for another update. As you can imagine the past two months have not been too kind to our portfolio. During this period, we have seen our investment portfolio decline by over 6%, this compared to a decline of 3.4% in the Dow, 4.9% in the S&P and 2.6% in the NASDAQ over the same period (June 22 - Aug 21).

Contributing to the sharp decline of our portfolio were our international and real-estate holdings. Vanguard's Total International Index has declined over 11% from its peak earlier this year, while Vanguard's Total REIT Index has declined over 20% from its peak, putting them firmly in correction territory and bear territory, respectively.

Here is our asset allocation as of August 21: Photo Sharing and Video Hosting at Photobucket

The past couple of months have not been a fun time to be in the stock market, but they have also not been that terrible for long term investors such as myself. Generally speaking, I am happy with our current portfolio strategy and feel that it is working well. For example, during the rough periods, our small bond position has been able to slightly dampen the volatility of our portfolio, as it was intended to do. In addition, while it is true that our real estate and international investments have taken a big hit recently, these sectors have also dramatically outperformed the U.S. stock market in recent years, so we have nothing to complain about. Essentially, our diversification strategy is performing as expected.

We will wait a little bit longer before jumping into the market with more money. When we do, we will increase our positions in both the real estate and the international asset classes to bring them more in-line with our long term asset allocation plan. As I previously mentioned, I try to re-balance our asset allocation by buying more of asset classes that have been under-performing, rather than by selling asset classes that have seen larger returns. This allows me to maintain the needed allocation, without triggering any tax consequences. You can read more about this strategy in one of my previous posts.

2 comments:

Armchair Fiduciary said...

Why do you have such a small allocation to international equities? Kudos for having any exposure at all (most people don't) but why not make it bigger?

Shadox said...

That is actually a very good question. Here is my answer: the first rule of investing is to know yourself - this is the level of exposure with which I am comfortable. One of the main risk factors of international investing is foreign currency exchange rate fluctuations. This is one risk that you are not exposed to with U.S. equities. Since my obligations are denominated in USD, I think it prudent to have move of my assets tied to that currency.

Having said this, I have thought about potentially increasing the total international exposure to of our portfolio to 30% over the long term. If I decide to follow through on this, I will do so by slowly increasing our position over a period of years.