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My Ideal Investment Allocation

Investing is very personal because it involves risk and risk is very personal. In my 20+ years of being a hobby stock market investor, I have learned a few things that have worked and tried many many things that did not work. 

I'll share some examples over time of lessons learned, but for this post I wanted to share what has helped make me a better, more at ease investor. You see, investing is also highly emotional. We work hard for our savings but because of inflation, savings is not enough. We need to invest that savings to ensure we don't lose purchasing power over time. But investing introduces the risk of losing your savings, let alone trying to keep up with inflation. There is nothing more irritating or quite frankly depressing than losing your hard earned savings.

This is where a balanced allocation comes into play. There is not a single investment that has worked since the beginning of time to preserve wealth, but there are several types of investments that have shown to have the best shot at doing just that. The secret is to own them in balance because what tends to happen is as one allocation starts to struggle, another might start to really perform balancing each other out.

There is a professional investor, Chris Cole, who wrote a fantastic paper called The Allegory of the Hawk and Serpent where he studied 100 years of investment history to determine the ideal allocation. The picture above is actually from this piece and shows all the various ways to invest and things to worry about as investors. His conclusion is that the ideal allocation is roughly 20% in stocks (equities), 20% in fixed income (bonds), 20% in gold, 20% in commodities, and 20% in long volatility (think of this last one as insurance protection against a drop in markets).

This allocation might be ideal for professional investors but it can be very difficult to replicate for retail investors. I've followed the principal of this but have tweaked my ideal allocation to the following:

  • 20% U.S. stock market
  • 20% Non U.S. stock market
  • 20% interest earning investments (bonds, real estate, etc.)
  • 20% scarce things (gold, precious metals, Bitcoin)
  • 20% cash and/or insurance
I've skewed mine a little heavier to total equities (40% between U.S. and Non-U.S.) but believe that recent history has proven that equities have the best potential for growth of capital, and to me that is key. I can put the entire 40% in Vanguard's Total World ETF (stock symbol is VT) since the U.S. is naturally about 50% of the world's stock market value. Or I can play around with different individual stocks and ETFs based on my personal criteria and where I see opportunities with a goal of keeping to the 50/50 balance between U.S. and Non-U.S.

For interest earning investments, with my background in hotels and real estate, I like to favor real estate. I like it better than bonds because it too has a capital appreciation component. This could be a simple starter investment home or condo or an investment in a real estate ETF like Vanguard's real estate ETFs VNQ and VNQI (U.S. and Non-U.S. respectively). Bonds are an option as well. In this environment, I am preferring short duration bonds since there is a risk that interest rates could rise and this could cause an impairment of capital for medium and long term bonds. My favorite go-to ETF for short term bonds is Vanguard's BSV.

For scarce things, this is where I like gold, silver, platinum, and the newcomer Bitcoin. The precious metals have proven themselves to hold value to inflation pressures over millennia and they should continue to serve this purpose. Bitcoin has come onto the scene recently and when you consider its properties, it has some key advantages over gold (even more limited supply and easier storage and portability). Given how new and unproven it is, I've put about 10% of the 20% (so 2% total) into Bitcoin. That should be enough of an allocation to really benefit on the upside if Bitcoin becomes widely adopted globally as a store of value. 

Scarce things could also include collectibles and rare items like art, cars, guitars, stamps, sports memorabilia, etc. These too have consistently proven to increase in value over generations. However, these are really hard to actually buy at a discount and sell at a premium. Unless you have a source of buying something of value from someone who does not realize it's valuable, I'd recommend staying away from collectibles as a store of value. Like most things, only the really rich typically benefit from collectibles by buying truly rare and extremely expensive items.

The last bucket is my insurance bucket. You never know when catastrophe can hit either to the financial markets or in your personal life. It is important to have that safety net. The goal is to try to keep up with inflation as much as possible. So I would recommend high yield savings accounts from American Express, Capital One, or others. These accounts are FDIC insured so you don't need to worry what the bank does with your money and you can earn a rate that is often close to inflation. Money market funds in a brokerage account can also work but have some risk to them because they are not insured and the interest rate usually lags high yield savings accounts.

One other option that I've started researching recently is whole life insurance. This is a very tricky area so I recommend proceeding with caution. Agents are typically incentivized to maximize their commission and getting you too much insurance that becomes an expense instead of a wealth building tool. But if structured right, you can get a policy that maximizes the cash value (meaning the part that you have access to) and grows faster than high yield savings accounts (often 3-4% tax free which is comparable to 5-6% pre-tax). Those kinds of interest rates are impossible to find in today's world so it is definitely worth considering. The other key to whole life insurance is to make sure the plan is through a mutual company and not a for-profit company. The customers are the owners of mutual companies and they will share profits with customers in the form of extra dividends that enhance returns. There are other forms of insurance that can protect investments, but these are the ones that I find most accessible and approachable.

As I mentioned in the beginning of this post, investing is very personal. Please do your own research and experiment (ideally without taking too much risk) with what works and doesn't work for you. I just wanted to share where I ended up after my years of research and experimentation and what I think will serve me very well over the coming years in preserving and growing my capital without making me worry too much about losses.