Monday, October 21, 2013

Portfolio Strategy

Assuming that all 12 of my asset classes are perfectly balanced, I will be having a 8% allocation in each class that totals up to 96%, with a 4% remainder.

So, what does one do with this extra 4%? I'm trying to come up with rules and structure for my own portfolio that gives me a bit of flexibility to identify opportunities and use that to increase my returns, while also not deviating too much from my prescribed school of wisdom that preaches diversification and the unknown future.

Firstly, I suppose that only one single asset class shall be up to 12%. That is the upper limit to any class allocation, and only 1 asset class may take up this 12% positioning. If nothing is compelling me to bet on that class, I may distribute the remainder 4% to 2/2, or 3/1 or 2/1/1 or even 1/1/1/1.

Secondly, if specific classes of assets can be forecasted with a high likelyhood of underperforming or overperforming, another asset class must be forecasted in a similar fashion to perform the opposite way. In such a scenario, it would deem fit to shift allocation from the potentially underperforming asset class to the potentially overperforming asset class.

Eg. EM bonds are predicted to face a huge loss admist taper talks, while Global HYs are predicted to capture this inflow and ride the economic recovery upwards. In this case, base allocation of EM bonds would drop from 8% to 6%, while HYs are ramped up from 8% to 10%.

An any one point of time, there shall not be more than 3 of these scenarios taking place at the same time. Which means, there can be only 1 reigning speculative asset class with a 12% allocation, 3 asset classes pinned to outperform with 10% allocations, 3 potentially underperforming asset classes at 6% and the remaining 5 class will be status quo.

This will ensure that although I try my hand as shifting around allocation, I don't lose out from the main benefits and purpose of my portfolio construction in the first place.

Lastly, if a catastrophe is impending, like a massive equity meltdown like in the great financial crisis, it would only be prudent to convert all holdings to be effected into cash, and if it is foreseeable that a particular asset class will be benefiting from this, it should be allocated into that class with caution. In cases of doubt, remain diversified or in cash. This scenario is purely only for emergency purposes, which I foresee to be happening perhaps once a decade?

Oh, I almost forgot that I will be allowing the holdings to naturally float around the 6-10% range until it is time to rebalance.

Rebalancing should be occurring as an entire portfolio review once a year, and as value averaging as an ongoing exercise when funds are available.

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