What's my Asset Allocation?
Jan 19, 2020
I’ve been getting a few emails and comments along the lines of this one:
Hi Ruth,
Thanks for sharing this awesome content with us.
Can you please consider a post about your overall investment portfolio. I know you have holdings in NZ50, US500, NPF, and an emergency fund, etc. How do you decide which one you will be investing in next? Do you have a ratio to follow? Let's say 25% in each of them or something like that. Do you have any other fixed interest investment other than your emergency fund? Any managed funds other than ETF? How do you keep the balance of your portfolio?
I'm just curious about your overall investment strategy.
Have a great new year ahead.
Eugenio
It would seem pretty straight forward but answering a request like this might paint me as the fraud I am because although investing is made out to be this confusing labyrinth of complicatedness I kind of try to avoid all of that when it comes to my own investments. So as a result, what you read on my blog does not exactly read like an article out of Money Magazine. My investing strategy is pretty simple and straightforward and I can't help but think that those who work day in day out in the finance space will scoff and laugh at my lack of analysis and strategy. But don’t scoff too hard, because it appears to be working just fine, thank you.
Because, Eugenio, here is how I allocate the money that comes into my life:
Debt and Income:
I don’t have any debt and I have no access to credit of any kind. A mortgage sucked up our income like a Dyson vacuum cleaner so we didn’t muck about and contrary to the advice we were given, cleared it as soon as we possibly could, which was in about 2007. And we vowed to never have debt again. That then left us free to invest and choose when and how we worked. At around that time I stopped all paid work to have our only child, then in 2010 the Christchurch earthquakes began which threw us into chaos and I finally returned to part-time work in about 2012. Jonny quit full-time work around 2011, took a break and returned to part-time work in about 2013.
Emergency Fund:
1.6% of our portfolio
We never leave home without it. We always have a minimum of $16,000 sitting in a bank account which represents about four months of expenses for us, which if required we could access immediately, that is, it’s not ‘invested’ or locked into a term deposit. It’s our “insurance money” for when the turd hits the fan, which it inevitably will at some point in life. I don’t engage in the theoretical debate of “this money could be invested elsewhere receiving XYZ return” because that’s not the point of an emergency fund. I don’t want to lock it away somewhere where I have to haggle, sell shares, sell property, pay fees, waste time or take on debt to cover an expense if something happens.
A real-world example of when it was useful was when the Christchurch earthquakes happened. It was a lifesaver because MONEY was the least of our long list of problems and knowing we could afford to keep paying whatever strange and unexpected expenses cropped up helped us focus on the emergency at hand. I can’t help but think of the thousands of people who have lost all of their worldly possessions in the absolutely tragic Australian fires, many of them will be needing immediate access to cash right now and that is why an emergency fund is so important and why I put it first on this list today.
Overall Investment Strategy: I ask myself “does having $16,000 sitting in a bank account help me sleep at night?”. The answer, “why YES it does”!
KiwiSaver:
14% of our portfolio
Both Jonny and I joined when it began in July 2007 and combined, this is our largest investment. We were each given $1,000 from the government and for the first couple of years, they gave us an additional $1042 a year before settling on the system we have today (you DON’T get the $1,000 anymore and you only get $521 a year). As soon as our daughter was born, we signed her up too. Ever since we have contributed whatever my employer was offering (3-4%), plus the same amount deducted from my part-time wages. Jonny, for many years, has been self-employed, so we have always made voluntary contributions for him of $90 per month. We have never ever withdrawn from our KiwiSavers, nor have we ever missed a month of making contributions and at the beginning of June, I have always gone back and checked that we have contributed enough to qualify for the annual government credit of $521 which is available to anyone over the age of 18. We have switched funds once when we moved away from ANZ which was charging fees like a wounded bull to Simplicity Growth. So, with minimal effort from us, our funds grow. The only reason we choose NOT to put more into here is that our path to retirement is different to the standard path of working up until the age of 65 then stop, start collecting the pension and then draw down on our KiwiSaver to top up our weekly income. Instead, we are both ‘semi-retired’ already and I want to know that IF we need to access money early, that we can via our other investments. We can’t access our KiwiSaver for another 20 years, so we invest outside of our KiwiSaver as well.
Overall Investment Strategy: Invest the minimum amount required into a high growth low fee fund and forget about it.
House:
70% of our portfolio
Stupid house. It makes up FAR too much of our net worth and I consider us too heavy in property, but what can you do? Housing is, in my view at least, overpriced in New Zealand and if we were to sell our home so we could downsize and release equity we would then end up with an equally overpriced house of lesser quality. We had a real estate agent come take a look at our whare and that is essentially what she told us.
I don’t have a love affair with housing that others have. We had a house in Christchurch, the earthquakes nailed it and all of that equity was tied up for YEARS while our insurer and EQC argued over who would pay for what. I don’t want that to happen again, so I’m trying to have as little money tied up in housing as possible. I will feel more comfortable when housing makes up 20 - 30% of our net worth and that is what I’m working towards, but we have a long way to go.
Overall Investment strategy: A house is a home to be lived in and enjoyed but it should make up a small percentage of our investments because it is so illiquid and while I’m living in it, yes we are fortunate that it is increasing in value, yet it returns no income.
Funds:
SmartShares NZ Top 50 ETF (FNZ): 4% of our portfolio
SmartShares US 500 ETF (USF): 2% of our portfolio
Sharesies SmartShares NZ Property ETF (NPF): 0.3% of our portfolio
This is where I’m investing the heaviest in order to get these percentages up so that these investments can collectively become greater than our house value and then will eventually produce returns that we can use to supplement our incomes in the years ahead. We have a long way to go. Currently, every dividend is reinvested into the fund. I think of these as buckets to fill up, one drop at a time and they each have a different balance. The reason is that FNZ was the first fund I had, a while later I started investing in USF fund, then, because I wanted to blog about Sharesies I started investing in the NPF fund. A habit was formed with Sharesies and I’ve kept up small weekly investments into that fund (about $30). For the other two, I invest directly with SmartShares a low automatic monthly amount of just $150 each, PLUS I do a lump sum investment each month as cash allows. We are on variable incomes so I know we can cover $150 into each fund easily, then I just do an extra payment depending on what money we earned that month. It varies a lot (from $300 - $1,000) but I always pay even amounts into the FNZ and USF funds.
I don’t have a magic number in my head that represents the ‘right’ percentage of our net worth to have in these funds, I just know that it’s a heck of a lot more than we currently have in there! The reality is that I’m just piling money in here, as much as we can afford, on a regular basis.
An investment expert would say that this is an ‘aggressive strategy”, I’m investing solely in equities. But I see it as investing in the 50 top-performing companies in the NZ economy, 500 of the top companies in the US economy and into a wide assortment of commercial properties in New Zealand. There is no cap on how well they will all do, some will have massive growth, some will plod along, some will fail and be replaced by the next top performer. We have the next 20 years to watch it play out.
Overall Investment Strategy: Never miss a payment into these funds come hell or high water and have faith that every company within these funds heads off to work on a Monday morning intent on having a great week. Paying into these is priority #1 and if money is tight this month, then I cut our lifestyle elsewhere (no dining out that month). I have no intention of cashing out any of these within the next ten years at the very least. Buy and hold.
Meridian Energy:
3% of our portfolio
These are the only individual shares I own and truth be told, if I knew then what I know now, I would not have purchased them and would have stuck with funds. Owning shares in just one company is far too risky. If it goes under, it takes my investment with it. And although I could tell you a few stories of the companies we have bought shares in, all of which have failed, as luck would have it, this investment has tripled in value! But let’s face facts here, I’m no stock picker and I have no interest in following individual company results, so this is the one part of our portfolio that provides me with the most doubt and I often think about selling it and reinvesting that money into the three funds I own (the FNZ fund holds Meridian units in the fund already so I have essentially doubled up). BUT, Meridian pays great dividends each year and that’s why I hold off selling!!! I make no contributions to this investment.
Overall Investment Strategy: I am considering reducing the amount I have in here by 75%-100% but procrastination is preventing this! Which is an excellent example of why funds are such a good wealth-building tool - there is no human element involved to second guess your decisions.
Gold, Bitcoin, Gender Diversity Index (HATCH), Ryman Healthcare (Sharesies):
0.6% of our portfolio
A bit of fun is all these are, and a fun exercise to learn about how gold and bitcoin work (not very well!). I bought just a tiny amount of Ryman Healthcare shares ($100) purely so I could blog about buying individual shares, but side note: they are doing exceptionally well! Same with the Gender Diversity Index Fund, I wanted to test out the HATCH system (and it’s up 3%!)
Individual shares and cryptocurrencies are too risky for me and gold does go up in value over time, is very pretty, but it’s really volatile and pays no dividends.
Overall Investment Strategy: Always be learning, but don’t bet the farm while doing it.
Cars:
2.8% of our portfolio
Some people include their vehicles in their net worth while others don’t because they are not an ‘investment’ as such and they don’t return an income, in fact, they suck up your income and only go DOWN in value. I include their depreciated value (I lower the amount they are worth each month) because if I needed cash the reality is that I could and would sell at least one of them. Plus, because I get to view their value in our net worth it works as a reminder to myself not to have too much money tied up in cars (an issue we faced in our youth!) because they go down in value horrifyingly quickly.
Overall Investment Strategy: Keep this percentage as low as possible. Cars are NOT an investment.
Cash in the bank:
1.7% of our portfolio
This represents the cash we have on hand for day to day living including the savings I set aside for things like a holiday or for upcoming large expenses etc. I would love to be like Warren Buffett and have piles of cash sitting here for “one day” when the markets have a correction and “shares are on sale” but the reality is, both of us only work part-time and have done for the last 12 years, so we don’t have the surplus to do that. I run a pretty tight ship and each pay is allocated to be put to use somewhere in our portfolio.
And finally, apart from the set automatic payments I have, I don’t divide up our income into percentages for living/investing. I run a tight budget, we are not extravagant people and we have planned for a rainy day and we are planning for things we have coming up (such as the dental work our daughter will need in 2020), then put pretty simply ALL of the leftover money goes into our investments. From time to time I look back at how much we earned and how much we ended up investing and it tends to be that we invest about 20-30% of our income.
SUMMARY
I’ve never referred to what we have as “our portfolio”, it’s simply referred to as “our investments” because I don’t see it as an elaborate strategy based on maths, percentages and calculations. It is far simpler than that and fits with what I often say to other people:
“always spend less than you earn and invest the remainder”
It need not be more complicated than that and if I were to boil it down, that is pretty much my overall investing strategy really.
At this time in our lives (we are 46 and 47), we don’t need to use any of this money which is currently tied up investments. We just need it to grow. Our incomes are enough to support our day to day lives. I don’t think of any of these investments as “a punt” or “oh well, gotta be in it to win it” or “we can afford to lose this money”. Instead, I know that if we continue to save and invest, put our money into the share market, which is currently in a real growth phase and commit to leaving it in for a long time, then over time those returns will compound and our net worth will grow at a faster rate. And while that is happening I allocate money to our daily needs, I have money for if an emergency happens and I have plans for many scenarios which may or may not eventuate.
There will be good years and bad but overall and over time it will continue to grow.
I’m not after fast returns (hey, it would be nice if I could get them) because they come with risk and they would cause me to chop and change our investments and that’s destructive to wealth building. I have settled on this strategy solidly for about the last four years now and blow me down if it ain’t working just fine!
It’s true that I’m yet to experience a major market downturn or correction, BUT I’ve been learning resilience in the face of a downturn in other ways. Those earthquakes DESTROYED our largest asset, our home. It was literally bulldozed into the ground and we had to build another one. And even though insurance did eventually pay for its replacement, this was about a three-year process/ordeal where we had to find somewhere else to live and work and during that time we could not release ANY money/equity from our house. So for me, having a vast majority of our net worth tied up in a house, a very illiquid asset that returns me zero income, is a huge risk. Yes, it is growing in value, but that’s no good to me unless I sell it and then I also have to buy in the same market.
Interestingly Bitcoin has been an investment/speculation that has given me a great lesson in volatility because at times we have more than doubled our money, then halved it again and what did I do? Sell in a panic? Hurriedly buy more? Nope. I did nothing. I just found the whole thing quite interesting really. FYI, it is currently up 25%!
So, I think that these experiences combined have put me in a unique position to know how I might act if/when the share market drops. I have set things up so that we don’t need access to any of that money, with our day to day banking accounts, our emergency fund, our ability to work, we can ride out a storm or two and from everything I’ve come to learn from writing this blog and being an investor myself if I’m going to invest, it had better be for the long term while having a focus on our daily needs as well. Because as sure as the market will drop one day, it will rise again in the months and years that follow and I’ll be staying for the ride.
A resource I often refer others to is the book The Simple Path to Wealth by JL Collins or to this podcast ChooseFI - The Stock Series - Part 1 because, although American based it was and remains the easiest to understand guide to investment that I’ve come across. I thoroughly recommend it as a step in your investment education.
Ta-Da!
There you go, Eugenio! And everyone else who has asked about or is interested in our investment strategy and allocation, hopefully, that gives you something to think about for your own journey? I have loved writing this blog post, I’ve never really done this sort of percentage breakdown, so I’ve found it interesting to go down this rabbit hole. But my final thoughts would be to not overthink things but just develop a simple plan and stick with it for many years to come. Sort out your daily money requirements (that’s why I budget), keep some money close at hand for a rainy day, take advantage of KiwiSaver and then invest outside of KiwiSaver and just build your wealth, slow and steady, month in month out. And never stop. Slow and steady wins the race.
