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International Asset Allocation

One of the primary reasons for this blog is to provide a public place for me to track my financial performance. In the last couple of years I have been converted to a passively managed asset allocation strategy, for a number of reasons that I won’t get into right now. By publicly documenting my financial performance I can (hopefully) demonstrate to others the validity of this technique and it will force me to be diligent in tracking my performance. As of the end of last year (2007) , the money I manage has almost totally been moved into this new strategy.

For now I would like to present my target asset allocation. Some of this is based of the model portfolios of IFA.

Geographic Allocation

Because I am not in the US, by geographic allocation differs a little from many of the recommendations. I roughly used the guide at the Efficient Markets Canada website to determine market capitalizations and came up with the following target.

Location Allocation
Canada 40 %
US 40 %
International 15 %
Emerging Markets 5 %

This is pretty heavily weighted in Canada (relative to our 3 % of world market capitalization), but since that is my home country it reduces some of the currency risk. Unfortunately it also reduces the benefits of diversification since my welfare is already tied pretty closely to other events in Canada. As more currency hedged funds come on to the market I may consider weighting this lower.

Valuation and Size

For this I primarily based my asset allocation on the research by Kenneth French and Eugene Fama which seems to indicate that, with little exception, in the long run value stocks and small cap stocks outperform the market as a whole. For this reason, and since I have a good 30 years investment horizon, I choose to overweight in value stocks:

Valuation Allocation
Value 40 %
Blend 35 %
Growth 25 %

and in small and micro cap stocks:

Size Allocation
Large 50 %
Mid 25 %
Small 15 %
Micro 10 %

Its not easy to come up with a portfolio that meets all three allocations at once, so I’ll share the tool I used for this in a future blog post as well as my actual portfolio and its performance.

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