Saturday, October 27, 2007

Asset Allocation - Oct 2007

It's been two months since my last asset allocation update, so here is a quick overview of our relative asset class weights as they currently stand:

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The biggest change in the past couple of months has been the share of our portfolio allocated to international stock. That share has climbed from 21.5% in August to 27.3% currently. That increase is due to both capital appreciation as well as to the fact that I have been slowly putting more money into our international funds.

To be honest, I am nervous about investing more money internationally, primarily because stock markets worldwide, but especially in emerging markets, have been on a tear in recent years. If there is one thing that history (and statistics) tells us is that things tend to regress to the mean, and if that is the case international stock markets are in for a little bit of a fall at some point.

I have decided to ignore my fears and to slowly increase our international position for two reasons: first, in the coming decades, I believe that the relative importance of the U.S. economy to the global one will decline, and that most opportunities for growth reside outside our small corner of the globe. Second, I am very concerned about the U.S. economy and the value of the Dollar - this is not a short term concern for me. I think that the Dollar is in for some long term declines, based on macro-economic trends. My goal is to insulate our portfolio from the effects of a declining USD to the best of my abilities.

I will say this: I clearly smell something is wrong with the global stock markets. Investing internationally has become a sort of a fad these days. AND if there is anything you truly want to avoid like the plague, it's investment trends. Nevertheless, I know that I am not chasing performance, and I will not try to outwit the market. I have a plan, the plan calls for 25% of the portfolio to be invested internationally, and this is what I am implementing.

The second portion of the plan I outlined last time was to increase our exposure to real-estate, especially now that the sector has taken a major hit. Well, even though I have slowly injected more money into our REIT Index fund, our total exposure to real-estate has only increased from 5.8% to 6% of the portfolio in the past two months. I will continue to slowly add to that position, until we reach my target exposure of 10%, but this will probably take another year, assuming no major market fluctuations.

Overall, things seem to be going according to plan. As I previously wrote, I will be introducing small, diversifying positions of commodities and global real estate into the portfolio at some point in the future. So far, I have not decided on the appropriate vehicles for such investments. I will keep you all posted.

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