Wow, that’s a mouthful. WTF is asset allocation anyway and why should you care?
In law terms, assets or property simply consist of real or personal property. Personal property includes cash, certificate of time deposit, bonds, stock certificates, and other capital instruments. Real property is simply comprised of parcels of land and that exhaustive list* of real property in the Civil Code.
Allocation is simply how your assets are distributed accross these different types of assets.
So you learned how to do and follow a budget, cut back on your shopping or gourmet coffee but still not making headway on your passive income** growth? You want to retire early someday but your passive income in the last year only accounted for 0 to 1 percent of your total income earned? You better check how much of your assets earn passive income.
Or maybe you wish for more rental properties and want to see more inventory of land or condos in your assets. Or maybe you wish to hold on to more cash. Does your current asset allocation reflect your personal needs? What percentage of your assets is in cash, real properties, shares of stock, or bonds?
I see a lot of local facebook groups promoting the whole no-spend month, 6-month challenge, or a specie of these things, which essentially just promote a diet from spending money. I suggest taking this a step further. Take stock of your assets, calculate your net worth, and determine how your assets are currently allocated.
Where have I sunk my money into?
Calculating your asset allocation is easy. To get how much of your assets are in cash, just divide your cash amount by your total net worth. Then do the rest for your other assets. As for me, monitoring my net worth necessarily entails tinkering with my asset allocation. My last net worth update here showed that I hold 33.24% in real estate, 24.60% in stocks, etc., 23.55% in cash, 13.43% in car value, and 5.19% in in retirement funds.
How liquid or illiquid are you?
Of my total assets, cash and stocks, etc. are relatively liquid assets. Cash is absolutely liquid, being the universal currency/mode of payment. Everybody accepts cash, you can use it to buy or pay for anything. You can come up to any store and pay cash in exchange for goods or services.
As for my stocks, bonds, and shares in non-stock entities, these are relatively liquid given that they can be easily sold anytime. There’s a huge market for them: the local stock exchange for shares of stock,*** the PDEX**** for bonds, while my non-stock entity is contractually obligated to accept back the share anytime. Thus, when you account for cash+stocks, etc., 48.15% or almost half of my PhP3.4m assets is relatively liquid.
The same cannot be said for real estate and other illiquid assets. I’ve written about them here, so I will not belabor this point.
What portion of your assets is in volatile stocks or fixed income (relatively safe) bonds?
If you want passive income growth, you cannot merely rely on cash, which also loses its value / purchasing power by 6%****** a year. Your PhP100.00 today may not buy as much in the next year. If you want passive income, you may want to buy shares of stocks or bonds, whether corporate or government bonds. As to what these are, I already wrote about them here, here, and here.
My business economics class taught me that 100 less your age= the % of your assets you should hold in stocks to allow for capital growth in the long term. The remaining amount may be held in bonds.
Thus, if you’re aged 30, your ideal asset allocation (in so far as capital instruments go) will be:
100-70= 30% bonds
This is merely a rule of thumb, of course. You should tailor this rule according to your personal circumstances (how liquid you need to be, do you feel safer with a fixed-income instrument like a bond with a set maturity date? ) and your ability to take risk. Can you sleep comfortably at night with your current asset allocation? These are things personal to each individual.
I personally just started tinkering with my asset allloocation. Life happens and I tend to go on auto-pilot with money and were it not for this blog and my use of a money app, I probably would neglect my finances altogether. A few months ago, I started rebalancing my stock-bond asset allocation to 70/30% from 100% stocks. Depending on my current needs, I may rebalance my assets every year from now on.
Have you ever tinkered with your asset allocation?
*Art. 415 of the Civil Code lists as real / immovable property: (1) lands, buildings, roads and constructions of all kinds adhered to the soil;
(2) trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable;
(3) everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object;
(4) statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovablel in such a manner that it reveals the intention to attach them permanently to the tenements;
(5) machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works;
(6) animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part ofit; the animals in these places are included;
(7) fertilizer actually used on a piece of land;
(8) mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant;
(9) docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast;
(10) contracts for public works, and servitudes and other real rights over immovable property.
**Growth of assets derived from passive income i.e. interest, cash or stock dividends, bond coupon, etc.
***I’m referring to publicly-listed shares of stock. Privately-held shares of stock (for companies not listed on the stock exchange) are not easily disposable as there’s no huge market for them. You will have to obtain a buyer at your own instance.
A few examples of these are shares of stock in hospitals (none of which are publicly-listed), small capital companies not required to be listed publicly, or maybe even large companies which have yet to comply with the Securities Regulation Code’s requirement as to minimum public ownership (large companies are required to float their shares on the stock exchange to allow public ownership of at least 15% of the company’s stock. Thus, even if you bought all of a company’s publicly-listed shares, you would at best, still be a minority shareholder at 15% ownership of said company.**** In actual practice, the SEC has still enforced only a minimum of 10% public float. Imagine if the public could get access to majority shareholding, then we would have increased say on how the corporation is run. But that’s a story for another day!
****Thus, I find it semi-pointless to attend and vote at shareholder meetings of the companies where I hold shares, aside from the fact that meetings are always held at company headquarters which are all located a plane ride far away in Manila.
****Philippine Dealing & Exchange Corp., where I may want to work in the future just to learn how it works in real trading life! Lol.
******Inflation rate is a bitch.
? Why do I always get carried away by my own endnotes? Hahaha.