Disclaimer: I'm not a financial adviser and this is NOT a financial advice (might not even be right). So don't consider it as a financial advise for any of your financial decisions.
This is Part 3 of this serie. For Part 1, go here: http://zombieprojects.weebly.com/blog/non-speculative-portfolio-part-1-introduction-and-objective.
3. How much of each instrument and sub-type should you buy?
According to Graham, unless you have a very good reason, you should go for 50-50 bonds-shares mix. According to Lars, this distribution depends on additional factors such as the level of risk you're willing to take. Graham's book recommends no more than a 10% in risky allocation which could be a good starting point. So you can reach a middle point taking both advises into consideration by doing:
10% risky government bonds, 10% corporate bonds 30% stable government bonds and 50% world wide-shares. Once again this is an ideal scenario and might be limited by the implementation feasibility. This portfolio maintains the 50-50 allocation advised by Graham and it's classified as a portfolio C (medium risk) by Lars.
The difficulty of implementing this portfolio will be finding feasible instruments and the amount of money to invest.
In order to keep the allocation under control pound (dollar) averaging strategy makes sense. The whole ideology of Graham is to buy more when prices go down which make sense too. Depending on the price you will be able to allocate more or less money automatically to each instrument. You might need to re-balance it when the proportion is broken but the idea is not to do this too often.
Thinking that when prices go down, things look better has one shortcoming and it’s that things might never come back to the level they used to be. However, because you’re buying over such a diversified universe, you should be shielded from this to ever happen (like the case of Japanese stocks in the 80s).
Another important advantage of dollar (pound) averaging is to avoid punctual massive errors. My gut feeling is that when you're starting with investment with a conservative non-speculative (passive or whatever you want to call it) approach, doing something stupid remains the main risk. For example, buying 25k of the wrong thing. By pound averaging, this is almost impossible as it will take a long time to get to dangerous amounts using a given strategy and you should be able to see warning signs on the way.
In summary the “ideal” allocation would be:
50% Bonds
- 30% Government Bonds
- 10% Risky Government Bonds
- 10% Global Corporate Bonds
50% world-wide Shares (as broad as possible) but as an idea, it should roughly be in the global economy proportion where:
- 35% US
- 20% Europe
- 10% Japan
- 10% China
- 25% Rest of the world (with Canada 4% and Brazil 3%)
This is Part 3 of this serie. For Part 1, go here: http://zombieprojects.weebly.com/blog/non-speculative-portfolio-part-1-introduction-and-objective.
3. How much of each instrument and sub-type should you buy?
According to Graham, unless you have a very good reason, you should go for 50-50 bonds-shares mix. According to Lars, this distribution depends on additional factors such as the level of risk you're willing to take. Graham's book recommends no more than a 10% in risky allocation which could be a good starting point. So you can reach a middle point taking both advises into consideration by doing:
10% risky government bonds, 10% corporate bonds 30% stable government bonds and 50% world wide-shares. Once again this is an ideal scenario and might be limited by the implementation feasibility. This portfolio maintains the 50-50 allocation advised by Graham and it's classified as a portfolio C (medium risk) by Lars.
The difficulty of implementing this portfolio will be finding feasible instruments and the amount of money to invest.
In order to keep the allocation under control pound (dollar) averaging strategy makes sense. The whole ideology of Graham is to buy more when prices go down which make sense too. Depending on the price you will be able to allocate more or less money automatically to each instrument. You might need to re-balance it when the proportion is broken but the idea is not to do this too often.
Thinking that when prices go down, things look better has one shortcoming and it’s that things might never come back to the level they used to be. However, because you’re buying over such a diversified universe, you should be shielded from this to ever happen (like the case of Japanese stocks in the 80s).
Another important advantage of dollar (pound) averaging is to avoid punctual massive errors. My gut feeling is that when you're starting with investment with a conservative non-speculative (passive or whatever you want to call it) approach, doing something stupid remains the main risk. For example, buying 25k of the wrong thing. By pound averaging, this is almost impossible as it will take a long time to get to dangerous amounts using a given strategy and you should be able to see warning signs on the way.
In summary the “ideal” allocation would be:
50% Bonds
- 30% Government Bonds
- 10% Risky Government Bonds
- 10% Global Corporate Bonds
50% world-wide Shares (as broad as possible) but as an idea, it should roughly be in the global economy proportion where:
- 35% US
- 20% Europe
- 10% Japan
- 10% China
- 25% Rest of the world (with Canada 4% and Brazil 3%)