New Venture Lab: Equipping Christian Entrepreneurs

Question

I've heard you speak about asset allocation in terms of balancing one's portfolio, but I wasn't able to follow all of the details.  Could you please go over an example asset allocation?

Answer

The answer that follows does not constitute investment advice and I am not an investment advisor, so please seek out a competent investment advisor for the crafting of a specific strategy that fits your situation.  There are many strategies that could be followed and is going to vary widely depending upon the goals, age and risk profile of the investor.  

In terms of general advice, I will this out in three simple buckets: those with no net worth, those with a small net worth and those with a large net worth.

• No net worth - my advice if you fall into this bucket is to get on a strict budget, get completely out of debt and start a disciplined savings program.  At this stage, there is no need for an asset allocation plan since there are no assets.  It is not uncommon for many Americans to have a negative net worth, especially young college graduates saddled with school loans, car loans, a mortgage, etc.  Their personal balance sheet is not very pretty and they are trapped in debt servitude.
• Small net worth (<$1 million of liquid capital or assets) - as the individual starts to grow their assets in this category, they should start moving their assets into different allocations to diversify their investment portfolio.  While they may start out simply by buying some public equity index funds or other simple investments, they need to broaden their allocations as their assets grow.  The asset classes that would typically be invested in at this stage would include:
• • Cash, such as money market funds
  • Public Equity, such as index funds, exchange traded funds, mutual funds or individual company stocks
  • Bonds, such as bond funds, individual company bonds or government bonds
  • Real estate, such as your home, rental property, or real estate investment trusts (REITs)
  • An example growth-oriented allocation might be as follows:
  • • Cash - 15%
    • Public Equity - 40%
    • Bonds - 30%
    • Real estate - 15%
• Large net worth (>$1 million of liquid capital or assets) - the asset classes for wealthy investors will typically broaden as many of the categories require investments have high minimum investments and carry greater risk.  (For example, the minimum investment into a single venture capital, private equity or hedge fund is usually $1 million or more and you would usually invest in all three of these groups and typically into more than just one fund each, so a typical alternative asset investment might be $9 million: $1 million each in three funds in each class.)  The asset classes that would typically be invested in at this stage would include:
• • Cash
  • Public Equity
  • Bonds
  • Real estate
  • Alternative assets, such as venture capital, private equity and hedge funds
  • Foreign currency to provide a hedge against unfavorable domestic currency swings
  • Natural resources, such as timber, oil and gas and other minerals
  • Precious metals, such as gold and silver
  • Luxury collectibles, such as art and automobiles (I am personally not a fan of this asset class as I feel it is too easy to be prideful with luxury collectibles)
  • An example growth-oriented and equity-oriented allocation might be as follows:
  • • Cash - 5%
    • Public equities - 25%
    • Bonds - 15%
    • Real estate - 15%
    • Alternative assets - 15% (perhaps 5% in venture funds, 5% in private equity funds and 5% in hedge funds)
    • Foreign currency - 5%
    • Natural resources - 10%
    • Precious metals - 5%
    • Luxury collectibles - 5%
      

Investors can track each of these asset classes and their average annual returns based upon public research with an eye on how his allocations are performing.  Assets are then usually shuffled between asset classes to rebalance the portfolio or between different companies or funds within an asset class in hopes of gaining a better future performance.

There are many sub-segments to each of the asset classes as well.  For example, in terms of public equity, there are Large-Cap, Mid-Cap and Small-Cap equities (based upon the size of the company); Foreign and Domestic equities; and Growth, Blend or Value equities based upon the type of opportunity the company faces.  And in terms of venture capital for example, there are angel investments, seed-stage investments and growth-stage investments.  An added overlay on equities is the type of company (manufacturing or services) and the industry.

As an aside, most super wealthy families that have hundreds of millions of net worth usually establish a "family office" and hire professional investment staff specifically to shepherd their wealth and investments.