Invest Like the Best: Badass Asset Allocation

What’s This All About?

Asset allocation is the determination of the amount of money that you’re going to devote to the different asset classes (i.e., equities, fixed-income, and cash & equivalents).  Variations in this tend to be for personal reasons. Determining the right allocation for you involves taking into account your goals, risk tolerance, and investment horizon.

While you can make allocation decisions between different asset classes, you can also further determine allocations within the various asset classes themselves.  For instance, for stocks, you can choose to allocate a larger proportion of your money to Canadian companies vs. U.S. ones or those from emerging markets.  As far as I’m concerned, the work that has been involved in learning about all the ins and outs of such things for me hasn’t been worth my time and effort (I wish I had known this before I started!). For you, I’d recommend that you look at my portfolio selection recommendations (coming soon!) and just pick one of those options, comfortable in the realization that someone else has already done the work so that you don’t need to devote the neurons to it.


Stocks vs. Bonds

The biggest rationale for paying attention to the proportional allocation of stocks and bonds is that, while stocks tend to give better returns over time, they can fluctuate wildly in the short term compared to bonds. For instance, if you figured you had enough invested to meet your future needs and are just looking to protect that amount (being ok with minimal growth), you’d allocate very little to stocks and have the vast majority of your money in bonds.  If growth is your main goal (e.g., you’re relatively early in your career as an attending and making a steady high income), it would likely be the opposite.  As we get older and our investing time horizon shortens, in order to ensure that we don’t suffer a catastrophic losses without the time to make this up again before we retire (i.e., needing to start using our investments for living expenses), we tend to put more of our money into the relatively more stable bond asset class.

As there is no gold standard for this, most investors rely on the guideline of allocating an amount equivalent to their age in fixed-income (i.e., bonds) assets and the rest in stocks.  For example, a 40-year old would have approximately 40% of their money in bonds and 60% in stocks.


Aside: A Note on Market Timing

As this is likely to come up at some point when you’re buying assets, let me just say this right now: don’t even try to time the market.  It’s not worth your time to try to commit the resources it takes to stay up on the rumours and to try to make appropriate adjustments to your asset allocation as a result.  In fact, it’s likely that you will only end up the worse off for it, as pension plans, for example, (managed by pros who do nothing but this) lose about 0.66% on average in returns as a result of market-timing activities.  And thinking that anyone can “add value” (yes, I’m talking to you fee-based financial advisors) by stock picking will cost you an additional 0.36%.  So, in short, don’t try to time the market and don’t try to pick individual stocks because it will cost you time and money.

Having said that, if you’re absolutely devoted to doing some sort of market timing, you can actually incorporate this notion into your Financial Badass Plan in an intelligent way.  Take a look at my post on “What to do When the Market Crashes” (coming soon – hopefully before the next time the market does actually crash) to learn what I recommend here.


Other Asset Classes

Here’s something that you likely won’t ever hear from your financial advisor.  I want you to strongly consider putting a significant portion of your money in another asset class (and by this I mean real estate).  While I do own stocks and bonds, I have also purchased a number of different types of income-producing real estate assets for a few reasons.  One reason for this is improvement of diversification.  Real estate is an asset class that tends to respond differently to the majority of market events than stocks.  Another reason is that the real estate that I own is something that I control directly and can insure against loss. I get a monthly coupon (i.e., dividend or positive cash-flow) from each one of my properties (or else I wouldn’t have bought them in the first place) and can use the power of leverage to multiply my returns (i.e., I put down 20% to purchase a property and have my tenants pay off the other 80% for me over time).  As long as I know what I’m doing, this means that the safety of this asset class is very, very high.  Also, the returns I get from real estate are ridiculous compared to my stocks & bonds (i.e., several-fold better in real estate).

The downside to owning real estate is that you can really lose your shirt if you don’t know what you’re doing.  It has taken me years of study and practice (and expert help) to get to the point where I feel confident in my ability to properly select and manage properties for high gain.  If you’re considering owning income-producing real estate but aren’t knowledgeable in the area, please reach out to me and I can put you in touch with a real estate expert I trust who can partner with you on a purchase.  You would probably have to forego 50% of the profits to compensate them for their time (you can negotiate that with them but that is the standard), but you’re still likely to make out like a bandit this way and the good news is that you won’t have to know anything or do much at all in the way of work in order to achieve the great results.

I recommend that you consider putting at least 30% of your investment money into real estate assets.  Personally, I have significantly more than this in real estate and I understand that there are differing opinions on this approach.  Looking at my returns, though, I’ll do my best to live with my decision….


Action Steps (15 minutes total)

  1. Take a look at your list of investments and figure out what asset classes you own and in what proportion.
  2. Ensure that you have something approximating the following:
    1. 30% of your portfolio in non-stock, non-bond asset classes
    2. Within your 70% devoted to stocks & bonds, an amount equivalent to your age in years allocated to bonds
  3. If you don’t have any money in non-stock, non-bond assets, get in contact with me and I can hook you up with someone I trust to put your money to use in high-quality real estate investments


What do you think about this asset allocation strategy for Canadian MDs?

Please add your two cents below.

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