Features

My asset allocation for 2013

Asset allocation is one of the most important things to get right when investing, says Bengt Saelensminde. Here, he looks at the asset classes he is invested in now, and how he aims to rebalance his portfolio for the coming year.

Asset allocation is the technical term for how you divide your portfolio between different types of financial asset.

You'll often hear it said that asset allocation is the most important thing you can do for your portfolio. And of course it's true. If you could pick out the best class of asset each year, be it bonds, equities, or commodities, then you stand a pretty good chance of amassing fortunes. After all, there's always a bull market in something.

But then again, none of us has a crystal ball. What are the chances of you picking out the right asset classes?

And even if you thought you could, it's inadvisable to chop and change your portfolio radically and too often. The costs mount up and you're bound to get your timings wrong anyway.

The way I see it, what you've got to do is say to yourself "where would I like to be a few months from here where am I going with my portfolio?" - identify a goal and gradually work towards it. Use opportunities as they present themselves and gradually work towards your destination.

Today I'd like to give you an overview of the direction I want to take next year. I'll take the four main asset classes and give you a brief summary of where I'm going with each.

Cash

The last couple of years have been tough. We've lived under the constant threat of a market correction be it trouble in Europe, the emerging markets, or the powder keg that is the Middle East. And, of course Western debt looks increasingly like a time-bomb... it's just the fuse wire looks a little longer than perhaps it has been in the recent past.

But that doesn't mean we have to play the ultimate fear card ie go to cash. I have kept a useful amount of powder dry specifically 25% over the last couple of years. Some in sterling and some in more worthy foreign currencies.

And overall, this stance has served me well at least it hasn't cost me much in terms of opportunity costs. I mean, the FTSE is only modestly higher than a year ago and commodities are down, and bonds have had a pretty good year. Who would have thought that as things stood at the end of last year? It just goes to show the value of diversification I'm pleased to have maintained my 25% weighting in bonds.

But I'm not happy to sit on this much cash as we head into 2013. I think the risks of a major equity blow-up have receded. Of course, the risks are still very much out there and therefore a decent slug of cash is advisable. But overall, I'm looking to trim my cash to around 20%.

Of course that cash is going to have to go somewhere...

Commodities

The CRB Commodities Index comprises 19 commonly traded hard and soft commodities, as well as oil and gold. It covers a wide base, but it's a useful barometer for this diverse asset class. As you can see from the chart, the year started off well, but suffered as the summer brought with it an emerging markets slowdown. From there things have recovered somewhat, so overall, we're down only about 3% on the year.

CRB Commodities Index

12-12-24-TRS1

Source: Bloomberg

Not everyone is keen on commodities. But I am. Especially gold. I'm going to use the current soft price in gold to continue adding during 2013.

I'll be looking at other commodity plays where I think there's value too. But overall, with the growing allure of gold, I'll be looking to have 30% in commodities.

Bonds and fixed interest

I've already mentioned that bonds had a pretty good innings during 2012. And many of the investments are looking fully valued right now.

As I say, it's incredibly difficult to get your timing right as you adjust allocations especially when it comes to picking the top of a market. And seeing as I believe interest rates will stay low for quite a while, I'm happy to keep a healthy amount of my pot in bonds.

But overall, I want to trim bond and fixed interest down from 25% to 20%. I'll be cutting out some of the bonds that have performed best over the last few years, and anything that matures during the year will be won't be reinvested.

Equities

There's no doubt that at 25%, my equity exposure has been quite stingy for someone of my age. Maybe that's because I'm a little bit more sceptical than most of my age...

But a low exposure to equities hasn't really cost me much. The FTSE 100 yields about 3.5% - and in terms of capital, we end the year up about 5%. No great shakes!

But I should also point out that I've traded quite nicely in and out of the FTSE too. I hope you enjoyed learning about Bollinger bands during the year. Basically I used this simple tool to help me make some short term gains trading in and out of the FTSE using a spread bet. It's important to remember that market volatility can be a useful ally we certainly shouldn't react in blind panic to market gyrations.

I expect there'll be plenty more volatility to come this year. I'll certainly be using the Bollinger bands to help time my moves.

My asset allocation adjustment for 2013

table { border: 3px solid #2b1083;font: 0.928em/1.23em verdana, arial, sans-serif;}

th { background: #2b1083; padding: 2px 1px;color: white;font-weight: bold;text-align: center;border-left: 1px solid #a6a6c9; }th.first { border-left: 0; padding: 2px 1px;text-align: left; }

tr {background: #fff;}

tr.alt {background: #f6f5f9; }

td { padding: 2px 1px;text-align: center;border-left: 1px solid #a6a6c9;color: #000;vertical-align: center; }td.alt { background-color: #f6f5f9; }

td.bold { font-weight: bold;}

th.date { font-size: .7em;}td.first { text-align: left; }

td.left { text-align: left; }

2012 allocation2013 allocationChange
Cash25%20%-5%
Commodities25%30%5%
Bonds25%20%-5%
Equities25%30%5%

These adjustments are relatively small. And they'll happen as and when the right opportunities arise, be it for liquidations or fresh investment.

Stay with me as we enter boldly into what is very likely to be an eventful 2013.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

The Right Side is an unregulated product published by Fleet Street Publications Ltd.

Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. https://www.fsa.gov.uk/register/home.do

Most Popular

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022
Is the oil market heading for a supply glut?
Oil

Is the oil market heading for a supply glut?

Many people assume that the high oil price is here to stay – and could well go higher. But we’ve been here before, says Max King. History suggests tha…
16 May 2022