Strategic Asset Allocation

Since I started my “real” personal investing on April 11st, my luck was favorable to me.

While the S&P 500 went up less than 5%, my portfolio achieved close to 5% return rate (including dividend, it’s 5.47% Year to Date!). Even after the dividend payout and net negative return in the U.S. market in June, my portfolio was rather robust (still outperforming S&P 500 by 1.4% and pretty much flat compared to Nasdaq, without dividend payment, as of 7/3/17).

  • My current portfolio composition as of 7/3/17. I withdrew $188 of my semi-annual dividends. including that, the return is ~5.45%.

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The question is, how I should adjust my portfolio.

Currently, my main investment strategies are:

  1. overweight Emerging market (India and south Asia including Indonesia) and peripheral Europe
  2. underweight the U.S. (less than 60%), but overweight small-cap
  3. slightly overweight Europe

The reasons are the following:

  • the U.S. market is way overpriced. For example, IVV (S&P 500 index fund) shows 3.07 P/B (Price-to-Book) ratio. This means the companies are valued 3 times more than its assets.

This point is more obvious when it is compared to the rest of the world. For example, IXUS (total international stock market except the U.S. fund) shows 1.66 P/B ratio, with P/E of 17.02 (IVV shows 21.69 P/E ratio). this shows the U.S. firms are overpriced much more than the rest of the world.

Yes, it is true that the U.S. market has been the only market showing consistent and continuous growth, but the valuation doesn’t support this, and valuation is pretty much the best source the information, if the future outlook and non-economic factors (such as political stability) are equal. For me, 2.5~2.7 of P/B ratio looks much more normal and acceptable. For instance, IWM (Russell 2000 index fund) shows 2.15 P/B ratio with 20.15 P/E ratio, despite the huge advance in their stock price during November last year. Considering this is more the U.S. domestic market (meaning that they are less vulnerable to the international turmoils, but more sensitive to the U.S. domestic issues), and the U.S. market is the only market with stable growth, this small cap stock investment is better.

  • India and indonesia finally got great leaders with great political stability. Now their economies are showing great(er) potential to growth and increase the quality of growth. What I mean by the quality of the growth is 1) reduced rate of income disparity gap growth, 2) more stable and sustainable economic growth, 3) and potential with clear evidence of growth.

There is no question that Modi is a great leader in terms of saving India from miserable sprawl-like growth agenda (=no agenda). He knows how to manage the economy, with little existing political ties, which made him to be more independent and innovative in implementing economic policies. People were worried about political stability, especially after the currency restructuring conducted last November, but the latest huge win of his party shows that the political stability is strong, with much better economic prospect due to the financial system innovation. In addition, India is a major source of cheap tech labor, which drew tech giants in the U.S. there is really no question that their economy will boom within 2 years, despite the recent stock frenzy in Indian market.

Similar reason to Indonesia, but with less certainty. this is because Joko Widodo hasn’t shown great economic agenda or implemented any major economic policies. However, his party also showed political stability in the recent polls, and the leader is not tied much to the military as well as the previous political party. With great economic potential and cheap valuation, combined with great leadership, the country shows reasonable potential to invest, despite their recent stock market rally and over-valuation.

  • I made some extra money (3~5% extra compared to S&P 500) by investing in Europe before, but people are still too much wary of the political instability in Europe. It is true that Britain is fucked up and that will have lingering negative impact in Euro region, but major economic indicators show European region is finally overcoming its gloomy economic status with brighter prospect. Thanks to Macron’s recent win in French election, it’s likely that more economic innovation and de-regulation will be followed. European Central Bank recently announced its rather hawkish view, but it is unlikely that their policies will be as swift as the U.S. Fed’s, due to its struggling economy. But it is coming, probably faster than many people think.

 

  • Lastly, I also think the recent over-valuation is due to the passive investment flows. Billions of dollars are pouring into the passive investment vehicles such as ETFs, while active investment platform suffers from fee cut and outflows (or decreasing inflows). These investors are pretty much non-professional investors who are looking for better return than the miserable bank savings rate. With long term investment, passive investment is the second best. For non-professional investors, it is the best. Thus, regardless of the valuation of the stock market, they just pour their money into these funds, every month from their paycheck.

 

I will eventually adjust my portfolio composition. This will be updated soon, probably by the end of this week.

 

 

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