The 90 Rule

Let’s start the new year by talking about money. I have been thinking of an appropriate portfolio allocation model following the wrath of the crisis that has wiped half of my portfolio value. As I have tinkered in different accounts mixing different asset classes, I have found something that further confirmed the mainstream adage of “don’t put your eggs in one basket.” It turns out that my 529 account, which holds the most bond allocation (some 30%), has declined the least, while other equity-dominant accounts have fared worse. Some fell by 60%.

Fortunately, I still have the bulk of my accounts in safe cash-equivalent instruments, set aside for further schooling purposes. Therefore, no adverse impact, caused by market gyration. However, the Rupiah depreciation of some 20-30% last month has caused a heavy burden on my side to continue saving for school. Thus I’ve decided to postpone further schooling for at least another year, bearing economic stability.

By taking lessons from the crash, I’ve come to believe more in the virtue of diversification, extending to debt instruments. According to the famous advice of the Vanguard founder, John Bogle, one should have bond allocation proportionally to one’s age. This simple allocation model advocates picking a number (as a proxy to one’s life expectancy) and subtracting it with one’s current age (as a proxy for bond allocation). The result will be the appropriate allocation for equities in one’s portfolio. While aggressive investors will use 110 or higher as the basis, the rule of thumb is 100. For example, a 40 years old should have 60% of his portfolio in equity and 40% in bond (100 – 40 = 60).

With slight modification, I’ve decided to use 90 as my basis. The idea is to put 10% of my portfolio in a managed account to generate continuing benefits for philanthropical purposes. The 10% allocation is arbitrary and excludes charitable expenses. Examples of financial instruments for this account might be a special-purpose mutual fund (like what I wrote some time ago) or a self-managed microfinance account. With that in mind, my portfolio allocation should be 62% equity and 28% bond. It seems that I’ve had a more significant equity proportion than I should, to my detriment. I’ll try to reach this allocation for my retirement portfolio by mid-year.

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