Cash portion of my asset is growing beyond what I feel is necessary (2 years worth liquid funds to maintain AVI family life-style). With US-market tops being breached consistently without any signs of slow-down, investment opportunities in the US markets is increasingly getting harder to come by. As such, I am starting to look into investment opportunities beyond the traditional stocks and bonds to what is generally referred to as alternative investments.

For starters, I wanted to figure out where I stand in terms of asset diversification, which is the topic for this weeks post.

Musing

Came across an interesting chart from HowMuch.net on the growth in bitcoin price relative to other high flying stocks of this decade. The chart (reproduced from the website) shows, $100 investment in bitcoin at the turn of the decade would have grown to over 9 M, which pales in comparison to the $3.3 K  figure achieved by investing the same $100 in the ultimate growth company of the decade, Amazon. Simply mind blowing! This even after the tummy-aching drop in the price of bitcoin from the peak of $20,000 reached in Dec of 2017 to the trough of $3,500 a year later.

Asset Distribution

The doughnut chart below shows asset distribution for my investment-portfolio. The bar plot below shows the distribution of assets for the top 4 asset classes in my portfolio.

Below are some observations from these figures

• My exposure to equity asset class is dominant component of my overall portfolio, standing at 82 % of which, 67 % is invested in US stocks and 14.3 % in international stocks.
• I am heavily large cap biased in my exposure to US stocks.
• My exposure to international stock is balanced with a slight bias towards ex-US developed markets.
• Alternatives form the next big bucket in my asset distribution. My exposure to traditional alternative assets include real estate, investments primarily through REITs and Gold. I have written extensively about Gold exposure in previous articles (here and here) and am primarily invested in Gold through the two Gold ETFs: GLD and IAU
• My exposure to bonds is primarily restricted to US markets and is heavily biased towards Government bonds, both short-term (1-3 year treasury index) and long-term (20+ year treasury-bonds).
• Cash corresponds to the funds sitting my various brokerage accounts sits at around 2 % of my portfolio. These are funds are waiting to be invested in the short-term.

Clearly, I have a home country bias. I know US-markets the best and have Buffet level conviction in “Never bet against America“. I am therefore quite comfortable having a US-market bias in my portfolio. However, that does not mean I should have exposure upwards of 65 %, which means some rebalancing may be warranted.

A recent white paper by Vanguard proposes a global-marketcap weighting as an appropriate allocation strategy between domestic and international equities. US equity markets stand at about 55 % of global equity markets, where as Canadian equity markets are at 10 % of the global equity markets. This would suggest that US investors should invest about 55 % of their stock assets in domestic US markets where as Canada-based investors should allocate about 10 % of their equity portfolio to Canadian stocks.

There is sufficient evidence from asset allocation literature to suggest that alternative assets should be part of any asset allocation strategy.  I want to highlight one particular figure below, which beautifully highlights the advantage of having alternative assets in the portfolio. The chart shows that a simple way to raise the efficient-frontier, i.e., the set of optimal portfolios that offer highest-expected returns for a given level of risk, is to add alternative assets to a portfolio.

I am some what heavily invested, at about 10 % of my portfolio, in alternative assets, which include Gold and REITs in almost equal proportions. These investments serve as a hedge against sudden draw down in equity assets. Given where we are in the market cycle, if anything, I want to consider increasing my exposure to other forms of alternative assets, a topic of future research and blog article for me.

My exposure to bond assets is currently sub-par relative to what would be considered “safe” for my age-cohort. Personal Capital thinks so too… Below is the target-allocation recommendation for my profile

I tend to agree with the target-allocation recommendation for exposure to US and international stocks, for bonds not as much. The reason being, I have the right temperament to withstand a significant draw down event, similar to the one we experienced in the great recession of 2008 and am have a relatively longer investment time-horizon. I therefore see no reason to be heavily invested in an asset class that has offered subpar returns over-long periods of time.

So there you have it, I am over exposed to US markets, under exposed to international markets and have a marginal exposure to bond assets.

Video/Book/Article/Audio for the Week

This weeks list includes,

•  Essays of Warren Buffet: Lessons for Corporate America by Lawrence Cunningham.  A short paper compiling key insights to be gleaned from Buffet letters, can be found here. For a full dose on the topic head over to here.
• A list of book recommendations from Warren Buffet, taken from his shareholder letters over the past 10 years, see here
• An interesting discussion with the famed value investor Bill Nygren on why he thinks Netflix and Google can be considered value stocks.