Wednesday, September 5, 2007

Asset Allocation Target Plan

Having researched asset allocation for a few months, I finally decided on my own target plan that I feel comfortable sticking with (at least till the end of the year).

Since I have a couple of accounts to manage (my 401(k) and IRA, my wife's 401(k) and IRA, and our taxable account), planning could get complicated. I came up with a top-down or hierarchical approach on the allocation. Specifically I have a global asset allocation, which I then split into the tax-sheltered and taxable portfolios, weighted by their relative sizes. The tax-sheltered portfolio further breaks down to the individual retirement accounts we have. The question of how to split asset classes into different accounts is a separate topic called asset location, which I will cover in a later post.

Our top level asset allocation is shown below:

Note that I don't have cash reserves in the allocation. This is because I always keep a fixed amount of emergency fund in bank savings or money market accounts. And the rest of our money is fully invested.

You will see a few interesting points on the allocation:

1) My international exposure, which totals to 46%, is quite heavy relative to normal U.S. investors.
2) I overweight on emerging markets and especially on China because they provide great diversification. Also I'm a Chinese and I might retire there, so it makes sense for me to aggressively participate in the China growth.
3) I have a tilt toward the small-cap side of the market. There are quite a few research studies that conclude that small-cap outperforms large-cap in the long run.
4) I have a 2% allocation on commodities. Commodities provide good diversification. However, I'm not fully convinced that investing in commodities is truly profitable, especially only with a passively-managed index approach. I will research this more. Currently I haven't committed any investment in commodities yet.


PFPF said...

国际投资那部分,也要按capital cap来划分一下吧? 另外,基金也分active 和 index,你打算各投多少?


Yi said...

In my pie chart, "developed" really means the large-cap companies in international developed markets, which are what the MSCI EAFE index covers. Then my "international small-cap" is these smaller companies from both developed and emerging markets.

I use index funds extensively. They are low in cost and clear in what they really invest in.