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Asset Allocation for 2018
PhilB
Posted: 07 January 2018 11:44:39(UTC)
#21

Joined: 24/06/2010(UTC)
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Hi TJL,
Yes, that is exactly what I mean!!!!

When I started looking at this, ETF's did not exist for UK based investors, so looked at mainstream funds, the gilts being an index fund (L&G All Stocks Gilt Index). I have since run a five-year analysis using ETF's only and it seems to be following a simiar pattern, but slightly lower returns.

The point being you can have a life outside investing if you want, and a very simple strategy will serve you pretty well. (After all, 7% pa doubles your money in 10 years).
2 users thanked PhilB for this post.
TJL on 07/01/2018(UTC), Mickey on 07/01/2018(UTC)
King Lodos
Posted: 07 January 2018 13:02:12(UTC)
#22

Joined: 05/01/2016(UTC)
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It's just not going to work going forwards.

This is historical gilt yields:

https://assets.weforum.org/wp-content/uploads/2015/06/150629-gilt-yields-voxeu-chart.jpg

When they're going down, capital values are rising – but now they're basically at 0 .. Last time they were nearly this expensive (1940s) gilts didn't make a positive return for the next 40 years.

So basically, the yield you buy at (even a fund) is a pretty good indicator of total returns going forwards .. UK Corporate Bond yield: about 2.25%.

So that's half the portfolio generating around 1% (and probably at least 2% below inflation, with no inflation protection). To put it in PE terms, you're buying assets with PEs from 50-100. Low yield = very expensive.


Where it could do well is if we really stumble, and get more stimulus, and push yields below 0 .. But a) that still doesn't leave much room to run; and b) it's a coin toss .. You might hedge an outcome like that, but you wouldn't bet half your portfolio on it.

50:50 Stocks and Bonds is a classic portfolio (Jack Bogle has the same), but with bonds now, you really are guaranteeing very low returns going forwards, with significant risk from inflation .. As much as we say "expensive defensives", I think defensive stocks are going to be the bond analogs for many decades, and should command much higher valuations as ppl realise this
3 users thanked King Lodos for this post.
Sara G on 07/01/2018(UTC), Tim D on 07/01/2018(UTC), Keith Cobby on 07/01/2018(UTC)
PhilB
Posted: 07 January 2018 14:40:44(UTC)
#23

Joined: 24/06/2010(UTC)
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Hi King Lodos,

Impressive analysis, and completely agree with your sentiments. The point about a 25% portfolio is its simplicity and relatively low volatility and decent long-term returns.

Poor returns on gilts and/or corporate bonds may well ahead for us (where have I heard that before?!), but will likely do better than equities when they tank - and pundits are always saying that will happen soon.

I guess I was reacting to Mr Shetland's query which echoes my worries over the years - have I got a sensible asset allocation for my risk profile, and in current conditions? The 25% portfolio is simple and requires you to sell high and buy low, whilst keeping a reasonable diversification to avoid major pullbacks.

Of course, you could take the view that all equities and all fixed interest are currently expensive. In which case, I suppose you would have to stay in cash and await the crash.
King Lodos
Posted: 07 January 2018 15:03:27(UTC)
#24

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Well I think asset allocation is the most difficult thing to figure out going forwards .. Anyone claiming to have an answer, you can pick a dozen holes in it.

And it's because we're in uncharted territory with monetary policy – and if it all works, it may be that markets never crash again (one reason it's never worth waiting for a correction).

I think what you *can* do – and what guys like Warren Buffett do – is look at assets; work out likely returns (with earnings yields or free-cash-flow yields and growth) and decide what looks more attractive on a relative basis .. And when I do this, things don't look terrible .. But you might have to be a little selective, and looking at Buffett today, he's down to 10% bonds, and otherwise all stocks and cash
1 user thanked King Lodos for this post.
Tim D on 07/01/2018(UTC)
Keith Cobby
Posted: 07 January 2018 17:39:15(UTC)
#25

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Interesting analysis KL and I think justifies remaining in equities. Also with fewer quoted companies (and more private equity) this should support higher valuations going forward.
1 user thanked Keith Cobby for this post.
King Lodos on 07/01/2018(UTC)
King Lodos
Posted: 07 January 2018 18:13:41(UTC)
#26

Joined: 05/01/2016(UTC)
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Was thanked: 2966 time(s) in 1176 post(s)
There's an interesting bit with hedge fund manager David Tepper from a few days ago, in which he makes the case stocks look cheap (edit: it's not the interview I saw – they're just talking about his quotes there):
https://www.cnbc.com/2018/01/04/david-tepper-says-market-is-as-cheap-as-a-year-ago.html

It's certainly not the majority view – but there is part of me that's been saying this for a while (the 'where else does money go?' bit) and add to that the tax package .. Plus Trump's telling everyone to buy stocks.

My pessimism is more around Tech stocks ... We're basing valuations on growth a few years into the future – and if that didn't materialise (how much bigger can Facebook get?) maybe you'd need some sort of correction
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