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Wednesday 12 September 2018

Where's Your Money?

Playing chicken with your investments. 
Diversification is a term that the cool kids investment professionals like to throw around a lot, and for good reason – as Nobel Prize winner Harry Markowitz put it:

Diversification is the only free lunch in investing.

Okay, so diversification is important, but what does it mean?

In simple terms, diversification means not putting all your eggs in one basket. But we should probably take this a step further and also avoid putting all our baskets under one roof.
And this is where diversification’s good friend and side kick, asset allocation, comes in. Asset allocation is deciding what baskets (asset classes) to put your eggs into, and under which roofs (where in the world) those baskets should go. In other words we should be thinking about diversification across asset classes as well as geographies and currencies.

For example I have decided that I want my eggs split between a property “basket” and an equity “basket”. I have then decided to put these baskets under a South African roof and an offshore roof (settled on a 50/50 split – call me “chicken” :-P). You can read more about my asset allocation decision in this blog post.

Asset allocation is something that every investor should be thinking about, and there isn’t really a right or wrong answer – everyone has different goals, risk appetites and outlooks. So it is important that you give it some thought and put your own spin on it.

However once you have made your asset allocation decision, you will soon realise that that's only half the battle – because the next problem becomes apparent pretty quickly….

How do you know if you are actually achieving your desired asset allocation?

You may have a company pension fund which you have no control over, you might have an RA, maybe you have a TFSA? These all need to play nice to achieve the allocation that you want. I was recently facing this exact dilemma while doing my monthly FIRE Tracking update. It was all well and good wanting to have a 20% property and an 80% equity split evenly between SA and offshore – but what did I actually have?

As with most financial dilemmas, Excel had the answer. And so I put together a spreadsheet which could do a recon of all my investment accounts, and their weightings in various asset classes and geographies (you can usually get these from your product providers MDD’s) and then give me a pretty picture of where I was relative to where I wanted to be.


I have made the spreadsheet available over here so you can do your own analysis.

The result is as follows (click for a larger image). The bright pretty colours with black text are my actual percentages, while the dull grey bars and numbers are my targeted percentages.

As you can see, I am a little heavy on the local equity front and somewhat lacking in the offshore equity and property categories. You can also see I have a fair amount tied up in some unwanted categories like Bonds (both local and offshore) and Cash (these are too pedestrian for my aggressive early retirement aspirations…)

Unfortunately a lot of this is out my control – Regulation 28 is such a party pooper. My pension and Preservation funds are limited in the amount they are allowed to take offshore, and they are also “responsible” by taking on some Bonds and Cash. So I am not going to be able to get those down to zero – oh well!

(Out of interest I have an “Other” category because my pension fund apparently thinks it’s a good idea to have some exposure to hedge funds…no idea why…moving swiftly along then...)

So what can I control?

Well I am in full control of the allocation of my TFSA, and I also have some say in how much I can put towards my company’s share matching plan – which I consider to be “Offshore Equity” (although I have got to be careful with this one as I don’t want too much of my investment tied up in just one company’s shares – that is not in line with our Nobel Prixe winners quote from the beginning of this post.)

So I will be allocating both my wife and my full monthly TFSA contribution to offshore equity and offshore property going forward. This will have the effect of slowly up-weighting the offshore stuff to be more in line with where I want it – of course I will never quite get there, but I at least want to be in the ballpark.

I will hopefully remember to give an update on this some time in the future…

Where Does Your Money Live?

Right so if you want to do a similar analysis for your investments, here is how to use the spreadsheet (there are summarised instructions in the spreadsheet as well.)

The first thing you need to think about is the asset allocations and locations you would like. You enter these in the “Targeted” row. For example, something like this:

You are welcome to rename the categories as you see fit. Maybe you consider offshore and local cash to be same thing and want a category for Crypto instead? Go for it!

Next, you need to find all your investment accounts. Pension funds, RA’s, preservation funds, TFSA’s, equity accounts, Unit Trusts (hopefully not!), etc. Give each account a name that makes sense and put it into the “Account Name” column. Pull in the totals for each of these accounts and put them in the Account Value column. Something like this:

You’ll see I have been so kind as to the total value of your investments (you're welcome :)) - useful for tracking your progress over time.

Next you need to find the allocations of the underlying investments in each account. This takes a little leg work but it’s not that difficult. ETF’s and Unit trusts usually have this info in their MDD’s so you can just visit the providers website. The pension/provident/preservation/RA funds should have some info on your account page or on their website. For your TFSA and discretionary stuff you can calculate the percent allocation yourself based on how much is in each ETF/Unit Trust/product.

I have made the spreadsheet quite forgiving – it will alert you at the end of a row if the total does not add up to 100% (don’t want any money going unaccounted for). There are some example values given in the spreadsheet - looks like this (click for larger image):

And now for the fun part…

At the bottom you will see the total value of your investment allocated to each category. You will also see the percentage value in the “Actuals” row:

And then, finally, for easy interpretation I made a chart of your actuals versus your targeted so you can see how you're doing:

As you can see, with these example values, not too bad, and most stuff is pretty much on track.

Anyways, I hope you find the spreadsheet useful, and let me know if you find anything interesting! 

Happy tinkering!

Till next time, Stay Stealthy!
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