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FinanceExplained

My Thoughts on Asset Allocation Strategy — and My Current Allocations

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What Is Asset Allocation?

For those of you who are not sure about what the term “asset allocation” means I think Investopedia has a very good and descriptive definition. “Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame” (LINK).

In other words, this investment strategy means that instead of putting all your money into stocks, you diversify by adding your money in different asset classes.

Examples of asset classes can be:

  • Stocks
  • Real estate
  • Crypto assets
  • Bonds
  • Gold
  • Art
Business man looking at his asset allocations
Vector created by dooder — www.freepik.com

“Don’t Put All Your Eggs in One Basket”

You can argue that asset allocation is important for multiple reasons. First, you have the “don’t put all your eggs in one basket” argument. If something happens to the basket, you break all the eggs. Imagine if your house is burning down and all your money is invested in paintings on your wall, you may have lost all your values. Another worst-case scenario that can cause you to lose your assets, is if all your money is in one stock and the company goes bankrupt,

The stock market is easier to diversify than for instance gold. This is because the stock market is so vast and consists of so many different stocks from all over the world. However, a global market crash can happen and that will most likely make most of your stocks sink in value. The stock market in itself lets you diversify within the market by having

“Time frame” is mentioned as an important parameter in the definition from Investopedia. This is relevant in the case of a stock market. A market crash is more devastating in the short-term and in the long-term. And in the long run, the trend of the stock market is upward. And the risk is all about the time frame. However, it does not hurt to be cautious. You may end up needing some money at a time that is not ideal.

Think if my 10 Year Target were destroyed by a meltdown in one of my asset classes. I can not guarantee that this will not happen. But having diversified I have a lower risk.

This is one of the reasons I have diversified into multiple asset classes.

Skin in the Game

I am always eager to learn. And as you may know by now I love watching the money grow. If I discover a new possibility to earn money or grow the new money I want to know more. That is the second reason for putting my money into different asset classes. When I started to buy stocks I swallowed all the information I could gather about companies, financial reports, financial terms, and market psychology.

When I started buying stocks in the market, that was when I really started to learn. I discovered that by having skin in the game, I was forced to learn more in order to not lose my money. My mindset needed to change to withstand the pressure to sell when a stock fell 1%. Or to freak out and sell when a trending stock had climbed 5%. By being in the market with my own money, I found out that when a stock had plunged 10% it did not necessarily mean that it was cheap.

The best way to become more responsible and force yourself to take action is by having invested your own money into the assets. It helps you learn what you need to learn, not everything else. “Nice, I received a dividend from this company”. What is a dividend? Why do companies pay a dividend? Is high dividend yield good or bad?

Examples From My Investments

This logic is also applied to other asset classes. Real estate is an example that has interested me for a long time. At the moment I am not invested directly in real estate. Since I want this to be one of my future asset classes, I am eager to learn more. I read an article last year, about a guy that was indirectly invested in real estate. He had entered into the asset class without the high cost of an entrance as real estate usually has. This intrigued me.

That’s how I discovered crowdlending. In this asset class, you do not own real estate, but you can help fund real estate. You can fund other projects as well, but the platforms I use are focused on real estate. By reading project documentation before investing/contribute to a loan I learn a lot about what it takes to fund real estate projects. Read more about it in my blog post on the topic.

The same applies to crypto assets. I was not one of the early investors that now lives in a mansion. But I was not the last one either. Most of you know how the crypto market has swung up and down the last couple of years. I think I am almost breakeven. But buying into crypto enabled me to learn so much more about what this was. I learned about different kinds of “currencies” and about blockchain.

This way of learning may not apply to all and some may call it risky. But I think everyone would have a steeper learning curve by having skin-in the game.

Vector created by dooder — www.freepik.com

My Asset Allocations

The pie chart below shows my current asset allocation. As you see I have most of my invested money in stocks and funds. And then I spice it up with some crypto assets and crowdlending loans. At the moment the crowdlending loans pay a rather good return.

Remarks Regarding Savings Account

A noticeable thing in this chart that some people will react to, is that I have as much as 19% in my savings account. Let me elaborate on this one. The reason I have this is that (apart from an emergency account) this money is in something we have in Norway called BSU. BSU is short for Real Estate Saving for Young Adults. You can see that the letters don’t match up, but I took the liberty to translate for you. This is an initiative from the government in Norway to make us save more. The account has some nice features and some limitations, but in short, this is the features:

  • You can save money in the account until you are 34 years old
  • You can put up to (approx.) $3,000 a year
  • The rent is much better than a regular account (mine is 3,6% at the moment)
  • You will receive a tax deduction of 20% of the amount you have saved last year
  • The amount you save can only be used for real estate related purchases. (You can break this but then you will have to pay back the earlier deducted tax)
  • Every year-end the money is locked and cannot be used for other than the mentioned purpose
  • Once you have used money after they have been locked, you cannot continue your savings

As you see this type of savings account is lucrative. And until I turn 34 years I will continue to fill this up and receive the benefits. After that my allocations will change and I will most likely use the money to pay down on my mortgage once the rent on my mortgage exceeds the returns on the account.

Do you have an asset allocation strategy or are you all-in on index funds or spare change in the mattress?

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10 Year Target

10 Year Target

Investor in my early 30’s determined to generate enough assets in the next 10 years so my ROI matches my expenses. Twitter: @10yeartarget

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