English Portfolio Management

Your individual strategic allocation

Your asset allocation will vary over your life cycle, and you should invest and position your overall capital differently as a young adult, mature adult and senior.

The asset allocation life cycle

The decision that will fundamentally influence the performance and success of your portfolio is choosing the asset allocation of your portfolio, which will vary over time. This allocation should vary over your life cycle, as your investment objective will evolve over the years of building and managing your portfolio. Therefore, you should invest and position your overall capital differently as a young adult, mature adult and senior

  • Young adult (early savings and investments): With your early savings, you should focus on stocks that will contribute to the long-term performance of your portfolio. Since they are quite volatile (they can fluctuate by several percent in a single day), it is important to start investing early, in order to avoid a bear market before making any significant investments. Mistakes made at a young age are also less important, you will have more opportunities to buy at reasonable prices and you will gain investment experience for the future.
  • Mature Adult (accumulation and wealth management): As a mature adult, you will continue to invest in stocks. However, you will view stocks, as part of your broader wealth, as risky assets. In addition, you will consider your state and corporate pension funds (which provide an annuity until death, similar to a bond interest, or more precisely, an annuity) and your real estate assets (primary or investment property). This will provide you with the big picture to determine if other risky assets are necessary and tolerable or if your future asset allocation would be skewed if you continued to aggressively accumulate stocks as you approach retirement.
  • Senior Adult (Portfolio Stabilization and Spending): As a senior adult, you should continue to hold stocks, but also bonds or annuities; as the safest part of your portfolio, these should also have more room. In this stage, the investor will need to consider the following aspects in order to avoid damaging mistakes for the stabilizing part of your portfolio:
    • In the post-pandemic environment of ultra-low rates, investing too much in government bonds is a losing game with a negative expected real return; however, pension funds, corporate bonds in your home currency, foreign bonds “hedged” in your currency or TRIPS could stabilize your portfolio;
    • In times of financial crisis, your bonds should generally suffer less than stocks (unless accompanied by high inflation);
    • However, because they are dependent on the interest rate environment, bonds are not without risk. If there is a liquidity shortage or a general panic, bonds will also fall;
    • In the context of international bonds, one should not add currency risk to the equation. Especially for emerging markets: even if their yields are high, their currencies are likely to lose value. So if you invest in bonds in your home currency, you will get a nominal return close to zero after conversion (into euros and Swiss francs, for example), which is unattractive.

You will therefore need to determine your target asset allocation in relation to your situation in each phase of your life. The granularity will always depend on the investor’s tastes, but the key to a portfolio is a reasonable split between risky assets and safer assets (stocks vs. bonds/pensions). Between concentrated and diversified assets (domestic vs. index stocks), choose diversification.

Each phase should have its target asset allocation. The granularity will depends always on the investor’s tastes, but a reasonable breakdown between risky and safer assets (equities vs bonds/pension) as well as between concentrated and diversified assets is key (home vs. index equities).

How to define your own asset allocation

A good individual asset allocation should follow sound principles and be based on a proven model (or mix of approaches). You can refer to the chapters dedicated to investment principles and models. In the meantime, and to get started with small amounts, you can consider the following numerical illustration:

A) For example, the targeted long-term strategic asset allocation for a Swiss investor might look like this for a diversified portfolio:

  1. 25%: Primary residence (high percentage due to high valuations in Switzerland or major cities in Europe);
  2. 30%: Pension (state and corporate);
  3. 5%: Cash;
  4. 40%: Own equity portfolio (free investments).a sound model. You should refer to the dedicated chapters (principles and models).

B) However, the current unbalanced asset allocation may look like this for many people living in Switzerland

  1. 0%: Primary residence;
  2. 80%: Pension;
  3. 20%: Liquid assets;
  4. 0%: Own stock portfolio.

In this hypothetical but realistic case (B), the individual has no exposure to equities and all his wealth is placed in a state pension system with an uncertain future. One option would be to use some of the pension money to buy a home and start investing in an equity portfolio. In the case of the Swiss investor above, at least 80% of his assets are concentrated and tied up in his home country. One option would therefore be to seek some international diversification (with perhaps higher risks, but also higher expected returns) and gradually invest cash in equities.

You can do this exercise for yourself. Like many of us, you may find that your pension fund comprises a large part of your assets. This does not have to be the case and you should take action to achieve a better balance.

Based on your asset allocation, you can determine which markets to expose yourself to and what index granularity you are looking for. You can look for indices at each level of aggregation, from the most global to the most specific (in descending order: global, developed markets, Europe and Germany for example). As a rule, keep in mind that the more specific the market, the higher the fees, except for some regional or country ETFs that are less expensive than global ETFs. Based on this, you can select the best ETF to meet your needs (as selection criteria, you will need to look at the features of each ETF, the current fees and the price level). In short, the goal is to start from your targeted global asset allocation to derive a target allocation of stocks that you can hedge with a selection of indices.