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5 Themes of Asset Allocation

Continuing with my retirement portfolio building, I’ve been thinking of dividing the portfolio into five asset allocation themes. I could have gotten away with only two of them (core equity and core debt), but where’s the fun? The five themes are as follow:

  1. Core Equity Holding – Geographic
    • This theme will act as the core holding for equity in my portfolio. As mentioned in my previous post the other day, the maximum allocation for equity is 62%. As I get older, that allocation will decrease to reflect declining tolerance toward risky assets.
    • It’s based on geographical diversity to achieve the widest market coverage in fewer instruments.
    • Due to its sizable holding, this theme will pretty much steer the direction and movement of the whole portfolio. Its allocation will be the first to be reduced for any addition beyond core equity and core debt.
  2. Yield Producers and Cash Equivalent (a.k.a. Core Fixed Income/Debt Holding)
    • This is the core holding for cash and debt instruments in my portfolio. In conjunction with the core equity holding, the allocation for these instruments should be 28% (remember, rule 90). Consequently, that allocation will increase as I get older to reflect increasing preference toward safer assets.
    • This theme will act as the ballast for the whole portfolio. As such, it should give stability to the volatile movements found in other themes.
    • As the “safest” holding, I’d rather leave its allocation alone after what had happened to my portfolio in 2008. I would consider its reduction only after taken into account the reduction I’ve made in the core equity allocation first.
  3. Satellite Equity Holding – Sectoral
    • The satellite equity holding is intended to enhance the expected return of the core equity holding. Its risk profile is higher due to its more concentrated holding and higher return expectancy.
    • It is based on sectoral diversity to give the theme more flexibility for fine-tuning and re-balancing, while still maintaining its “spicy” sector bets.
    • Obviously, allocation enlargement in this theme will reduce the 62% I’ve allocated in the core equity theme.
  4. Alternative Assets
    • Alternative asset will act as the main diversifier for the portfolio as a whole. This is because alternative asset is expected to have low correlation with the other themes in this portfolio.
    • As the wild card, alternative assets are expected to work in conjunction with the other themes both as a return enhancer and a volatility stabilizer. By itself, alternative assets can be highly unpredictable.
    • By far, this is the most difficult theme to assemble due to the limited instruments available for retail investors and my limited experience in this type of investment. It should be most interesting area to explore, albeit gradually.
  5. Green Investments
    • Green investments, in this case, are meant for socially responsible investment (SRI) instruments not falling into one of the other themes. As a rule, instruments chosen to represent the other themes, especially core equity and core debt, should be of SRI alternatives including shariah-compliant instruments. Once they’re exhausted, further SRI consideration should be placed here.
    • Depending on the weight of its instruments, this theme can be very volatile, even more than the satellite equity holding due to its extremely concentrated sectors.
    • Allocation for the green investment include the 10% in philanthropy account. Thus, a 100% allocation for all the five themes can be made.

There you go, five themes for the retirement portfolio. Although it may be implemented over different accounts, the retirement portfolio should adhere to these five themes, which can be a laborious effort. I didn’t know of any easier way at this point, but I guess I have to make do with Excel for the time being.

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