What should my asset allocation look like?
I am 25, setting up monthly payments to probably 5 or 6 index funds. Willing to just leave it alone for 10-20 years or more (but re-balancing allocation every year). I am thinking along the lines of:
20% USA stocks
20% UK stocks
20% Europe stocks
20% Japan stocks
20% Emerging stocks
Should I have more in USA? More/less in emerging? Is this too biased towards Europe? Should I have some in bonds? Would you bother with gold? Anything else you can think of?
Answers
2786 points
Oldman answered one year ago …
I believe you are in Britain, and there's a class of funds that you can access that I can't as a U.S. citizen...they're commoditiy specialties, called ETC's , and produced by ETF (http://ETFguide.com). Thus you could also allocate a small percentage to a specific, rising cost commodity, such as rice, corn or cotton.
In addition, you indicate index funds, but there are many types: cap-weighted (common) and others that follow somewhat more actively-managed approaches. I don't know if you are able to access http://www.SeekingAlpha.com, but I certainly would look carefully at the way the components are rebalanced.and weighted in a portfolio.
.If you want the best results, DO NOT USE FIXED-INTERVAL rebalancng;, but rather rebalance when an allocation has drifted significantly above or below your target. You can do this by purchasing more of an under-performer, or by selling a portion of an over-performer.
There are index funds that track just about every market segment, large/small; growth/value; domestic/foreign/emerging...etc. In addition there are some newer ones that have World/or World, ex U.S., EAFE, or EAFE ex Japan... etc. The SeekingAlpha site has some of the best info on ETFs available anywhere, because there are hundreds that have been analyzed and compared, warts and all, and their yearly performance is tracked by a number of editors: by Geoff Considine vs. risk; by Matt Hougan and Mr. Shaw as to the merits and costs of the new ideas, etc.
You also should be aware that some of our trading brokerages are now offering hundreds of "free" trades ,with no expiry time, with new accounts of U.S.25K or more overall. This will probably spread to the London & Euronext soon, so you won't have to consider the "fees" to purchase small lots, which can reduce the yield of ETFs.
I am baissed for investing new funds into 1. Foreign real estate and 2. Latin American steel and cement producers:, the first has been beaten down, while the second is growing by demand from the China& India.
I believe cap weighted indexes of developed countries haven't hit bottom yet; UBS, British Banks & Investment groups, French and German and even Swiss investment groups are still holding a lot of "toxic" paper. So the problems with the U.S. cap weighted indexes, i.e., rallies in a downward trend, will continue in the developed economies for some time.
But you can start by putting some money into a good brokerage's money market; set up your plan; and all the paper work for direct deposit and withdrawal, and 'paper trade' to find the balance of risk and dispersions (diversification) that you are comfortable with.
At 25 yrs of age, even if you don't get stellar returns in the first few years, you will have the compounding effect of time on your side. A market return of 2% above inflation and taxes will double the initial deposit in 36 years; but if you can deposit $500/month, with a 2% real gain/year over the same 36 years you will have about $311,000 of real wealth accumulated (of course you returns will be much, much larger in nominal currency, but a 2%/year "real return" is one that many mutual fund holders would love to have). So 36 years from now, if the token to ride a carrier is the equivalent of a dollar now, you will have accumulated a lot of them ... even if the cost increases and the nominal currency depreciates. At that time, you may consider collectibles/bullion/ art, but these all have their carrying costs of appraisal, insurance and storage.
I would not consider bond funds at this time, except for high-yield intl or sovereign debt, because Corporate and National bonds have under-performed equities for every 10 and 20 year rolling period since the 1700's. When you're 60, you can consider any pension, social security equivalent payment, etc., as a part of a "fixed-Income" portfolio component. But not now, for you. (bonds have yielded about 4-6 % above inflation & before taxes: equities about 7-11%, and cash about 1/2 of a %). Unless you become a sophistocated bond trader, that's a poor investment return.
I certainly wish you the best.
4037 points
MNSL answered one year ago …
I think Oldman has given some good points. I like to add some more. If you can do some research you will be able to find some excellent investments opportunities in UK time to come. It is better to invest in early stage of growth. As a key centre for international investment there will be great investment opportunities in UK in next 02 years.
If you are living in London there are wide varieties of f investment instruments available in UK. Some of the new Funds listed in London are:
Two ETFS Listed by Deutsche Bank tracking frontier markets
The two funds offer exposure to the new emerging countries by tracking the FTSE Vietnam index and the S&P Select Frontiers index.
Advanced frontier markets fund
Please note that I do not have any investments in above funds.
4086 points
EthanR answered one year ago …
Two excellent answers above. All I would add is that I think I would diversify into Asian stocks, rather than just in one country, Japan. For many years the Japan market did very poorly. You would not have wanted to be in just that one Asian country during that time.
I am also not seeing any of the BRIC countries in your model portfolio. That would be Brazil, Russia, India, and China. I think those areas will do very well in years to come, and I would allocate part of the total there as well.
2786 points
Oldman answered one year ago …
I found a good, free site for all of your questions concerning allocation, diversification, risk, rebalancing, and more, including the balance between bonds and stocks, domestic and intl, value, large cap, etc. It's called FundAdvice.com,
http://www.fundadvice.com Merriman is a well respected financial advisor...
and it's been around for a long time. It has model portfolios's, comparisons for buy-and-hold vs indicator (150 day moving avg) trading. It even has a simple to follow sequence of what to buy with $5K/yr, over a 10 yr period.
Many of the funds will be available to you in the U.K., and even so many of the principles given above apply if you are in any country. I know the Inland Revenue system is much different from our tax system, but the articles are well-written and tabular examples show the positive effects of diversification and uncorrelated assets.
MNSL's and EthanR's responses, as well as my own suggestions at the end of my lengthy response yesterday, are all good current suggestions, given the state of the developed economies' credit problems. But what about 3 -5 years from now? Merriman's writings are timeless.
