My Asset Allocation (July 2019)

A good month, as usual.

I was thinking about the format of my monthly update posts, especially the Asset Allocation part.

Basically, if one has a defined allocation, there is not much to report about it on monthly basis. Yes, the proportions will shift a little bit, but during rebalancing they’ll come back to their initial percentages.

Of course, as a passive investor, I contribute the same EUR amount to my stock portfolio each month and keep what’s remaining in cash. That’s my investment strategy, basically.

However, part of my portfolio is in Cryptocurrency. That’s an asset class I’m not cost averaging in continuously nor I’m selling every month when the allocation becomes heavier. In other words, my crypto investments are like a separate portfolio that has nothing to do with my overall allocation. I had (and have) an amount I was (am) comfortable risking in it and based on my forecast, I will miss out on more gains as the BTC halving approaches if I rebalance it monthly.

P2P lending is another example. I haven’t contributed much in it in the past few months as well. So the proportion of wealth allocated in loans shrinks month by month, making it supposedly “inconsistent” with my initial asset allocation.

But is it?

It depends. If I had a strict setup where I was certain that I want (for example) 50% stocks, 30% cash, 10% P2P, 10% crypto, then it makes sense to rebalance this portfolio. However, I’d split my overall portfolio into two parts. And coincidentally, there are terms describing the two types of asset allocations.

Strategic Asset Allocation

I wrote about asset allocation a lot in various posts. Whenever I used the term, it was in a context of a passive portfolio and building long-term wealth. However, the right term for it is strategic asset allocation.

In my case, having a portfolio of the above mentioned asset classes, not every one of them deserves to be in this category.

For example, this is my current strategic asset allocation when it comes to Stocks & Bonds:

Yes, at this moment I don’t hold any bonds. I’m not against it, but my reasoning is out of scope of this post.

And to be honest, I’m not sure if I need to include cash in my strategic allocation. Yes, I save a pretty similar amount each month, but some months I’ve decided to finance some loans through P2P lending, some months I’ve decided to buy BTC, etc. I’m not keeping a certain percentage amount of my full portfolio in cash, but it’s consistent in the range of 35% (+-5).

This cash is meant to be used for eventual down-payments, lump-sum investments after certain events, or jumping in on unforeseeable opportunities. Of course, an emergency fund as well.

Tactical Asset Allocation

Unlike the strategical asset allocation, TAA is is an more active asset allocation strategy in which is common to shift the weights of different asset classes in order to realize more profit. The allocation itself depends on current events and market conditions rather than solely on the investor’s risk tolerance, investment horizon, or long-term goals.

I’d say that it’s usually short-term, but not necessarily. I’ve made more than 200% gains on my crypto portfolio and I could realize them today, but I don’t. I hodl because certain events make me expect more gains in the future.

And there are always current events / conditions that can hint about what to expect from a certain market or security, of course depending on our knowledge and perception. During my Become an Investor Series I gave examples about weed stocks, the Facebook pullback in November, etc. – all related to current events that investors/speculators could profit off of. Some current examples are NVDA, ATVI, and TSLA. What do you think will happen with those?

Disclaimer: This is not an advice, just a few examples of stocks that dropped in value. I’m buying the market and not picking stocks. 

And let’s say you realized some gains. What’s next? Basically, there is no rebalancing in tactical asset allocations. There are no asset classes that are meant to be brought back to their initial proportions after certain events, such as booms or busts.

And the proceeds… They can be reinvested in the passive portfolio, thus becoming a part of the long-term strategic asset allocation.

Okay, with all that said, my current cryptocurrency and P2P investments fall more in the tactical rather than in the strategic section. I could sell half of my crypto portfolio to bring it back to a one digit number and I could add some money on the P2P platforms so they’re at 5%, but I don’t.

So… Why don’t I rebalance these asset classes?

Okay.

Imagine if I kept my cryptocurrency exposure at 5%. Let’s say my portfolio is at $200k, so I have $10k in BTC. Let’s say that there is a bull run and a bubble forming, so I periodically take profits and rebalance it accordingly. My NW grows to $300k. All good! The bubble pops and the 5% allocation falls 50% to 2,5%. I put $7,5k in crypto and it goes even lower – another 50% drop… And I keep losing thousands of dollars month after month, just because I’m trying to include a volatile and risky asset into my long-term portfolio. What I should do (and do) instead is: invest an amount that I’m comfortable taking risks with, understand the market cycles, create an exit strategy, and… Execute it. No need to put money in something that’s more than obvious that is getting into a bear market.

The exact same thing can’t be said for P2P, as it’s not infamous because of bubbles and devastating crashes, but it’s still an asset class that I’m not comfortable scaling at the pace that I do with my stock allocation. I view it as a separate entity as well and it will have the same pie chart as my Stock and Crypto portfolio – yes, my P2P allocation is 100% P2P. And the absolute euro amount I put in it has nothing to do with the relative amounts I’m allocating in stocks or keep in cash each month.

Asset Allocation

Back to the old habits.

This is the current allocation of my full portfolio, all asset classes included.

After I explained what strategic and tactical allocations are, it makes more sense to show this section. This chart shows how different assets move relative to the others and also as a portion of my full net-worth. I’m not sure if I should include it month after month, but here it is for July.

Although I experienced gains in the stock market, the cryptocurrency portfolio fell down for a significant portion. Especially the altcoins. They were bleeding out slowly throughout the month, while Bitcoin was less, but still, volatile.

Another thing I’d add, as mentioned in my Overcome Investing Fear post, the S&P 500 hit and surpassed the psychological threshold of 3000. Here’s the beautiful chart of its performance during 2019.

If it wasn’t for that drop that happened today… 🙂

Just kidding, of course, it doesn’t matter. Long-term is the term I’m preparing for!

And lastly, here is the YTD performance of BTC, as a representative of my cryptocurrency portfolio. It pulled back quite a bit during the last month. But for me, as a speculator expecting the decreasing supply to work its magic after the halving, it doesn’t really matter as I’m not selling anything just yet.

Yes, nothing matters in my eyes. That’s how I live my life.

FIRE Progress July 2019

My FIRE progress increased from 42,99% to 44,71%.

As usual, a great month.

When I started MonkWealth, I didn’t expect this number to grow at such a fast pace. I’m really happy to see it! I’m also prepared to see it cut in half during certain unfavorable events.

Money worries indeed become less of a problem once you own a substantial amount. When I was worth less than €50k (and I’m not saying that it’s a small amount) and still didn’t invest, there was a constant worry in the back of my mind reminding me that I’ll never be able to retire at this pace. This changed significantly when I joined the six digit club and even more as the amount continued to increase at a faster pace than my savings rate. Don’t get me wrong, I’m still extremely conservative with how I spend, but the gains and the fact that in some months my net-worth increases by more than my actual salary (after all expenses) reminds me that FIRE is possible and actually within reach.

Starting to invest my money was a big contributor to this process.

And if you’re a saver, you should look into it too.

Until next week!