Good reads from around the Web.

There is a blue ceiling above London this morning. After 100 days of rain, it’s hard not to be sure that it’s the sky, as opposed to an incoming deluge.

I’m going to chance it and head Outside.

[continue reading…]

I admit it: I’m a capitalist. I believe in free markets. I think the invisible hand can do more than pick pockets and grope hard-pressed students packed onto the privatised railways.

Greed can be good – if it makes companies more efficient and brings more of us the products and services we want at lower prices.

Outrageous? Before you lynch me, you’d better know I’m not the only one.

We capitalists aren’t horned beasts dancing around pyres of sub-prime mortgage certificates. We’re men and women of all shapes, races, and ages. We have places where we get together, where we whisper to each other interesting business opportunities and swap tips on investing our SIPPs.

But these days we’re scared to be out and proud.

What a shame! We live in a capitalist world, and it’s only by living as capitalists that we can truly make the best of it. Capitalism isn’t just for golf club swingers and septuagenarians in South Kensington. It’s the system we all work within.

Unless you’re a dropout living in a tree tent above an anti-fracking campsite, you need to know the rules of the game to thrive. Taking a half-hearted approach to capitalism is like a goldfish taking a half-hearted approach to swimming.

You have to be in it to win it.

This is especially true as one of the least cuddly aspects of capitalism is it helps best those who help themselves.

The quickest way for the 1% to become the 0.1% is for the rest of us not to play the game.

With that in mind, here are 11 tips on how to be a capitalist.

1. Get some capital

Clues in the name. To be a capitalist you need capital. You can then invest this money to make more money, and be on your way to mega-riches. (Dust down your old Monopoly board if you’ve forgotten how it works).

I think one of the great strengths of capitalism is that it’s theoretically open to anyone. Rival systems claim to be more fair, but invariably they boil down to who you know (Marxism), who your parents were (feudalism), or who you were prepared to shoot in the head (dictator-ship-ism).

Most human beings will try to get ahead. Capitalism harnesses this, rather than fancifully suppressing it only to see it come out in less useful forms.

So, how do you get your capital?

Obviously it helps to be born to a rich capitalist1. But most of us will need to spend less than we earn.

That difference is your seed corn. Saved and invested, it will be the start of your capitalist empire.

2. Own the means of production

Here’s what Karl Marx knew and you should, too:

“In capitalist countries, the rulers own the means of production and employ workers. Means of production are what it takes to produce goods.

Raw materials, machinery, ships, and factories are examples.

“Workers own nothing but their ability to sell their labor for a wage.”

If you want to thrive in a capitalist economy, you need to follow Uncle Karl’s advice and get yourself some factories, machinery and ships. Or rather their modern equivalents, like data centres, luxury retailers, and offshore oil drillers.

If you don’t own the means of production, then all you’re doing is selling your labour for a wage.

That is, you’re a wage slave.

Happily capitalism has come a long way since Marx’s time and it’s now easier than ever to get your share of the money-minting machines.

By putting your money into a stock market tracker fund, you’ll buy a slice of all the major listed companies in the country – or even the world, depending on which fund you buy.

These tracker funds are cheap to own, and enable you to leave your company managers to get on with making profits. As they do so, the companies will become more valuable, and the value of your holdings will rise.

By reinvesting the profits they pay out as dividends, you can buy more slices of the companies, too. Over time it’s reasonable to expect 5-8% growth a year in today’s money terms from your basket of global companies.

3. Own other assets, too

Owning a slice of the productive economy is key to getting your stake in the capitalist system, but companies are not the only assets to amass.

Other potential things to buy are rental properties, fixed income investments like bonds (where you’re basically making a loan to a company), and of course you want to keep some cash handy for future corporate raiding (a.k.a. buying into the stock market when it’s cheap).

You might even consider making loans to spendthrift wage slaves via Zopa, which now has a Safeguard in place that should protect you from bad debts.

The key is to have more income producing assets than money-sucking liabilities.

Some argue that our economy sneakily tries to turn even high-earners into indebted consumers. That way they stay on the treadmill of working and spending, enabling those at the top to stay rich.

I won’t get into the conspiracy theories here. But whether that theory is right or wrong, by refusing to play the consumption game and choosing to own assets instead, you’re closer to the top of the pile than the bottom.

4. Treat yourself as a company

Who is the archetypal capitalist – Bill Gates or Richard Branson?

For me Branson wins that matchup every time.

Gates may be richer, and with Microsoft he built a far bigger and more world-altering business than Branson ever did.

But Sir Richard is the consummate entrepreneur. He’s restless and forever shuffling his cards, always looking for how to best spend the next year and the next dollar to greatest effect.

Branson understood early the power of personal branding, especially in a nation of shrinking violets. And on a personal level, he doesn’t get hung up on what he can’t do (he’s dyslexic, for example) but rather on what he can.

Virgin is Branson, and his business activities are an extension of his ambition and of his curiosity about the world. It’s as far from the wage slave mentality as you can imagine.

Like Branson, you can treat yourself as a company, too.

What are your strengths? Where can you deploy your talents to earn the highest return? What assets are you not using, and where are you wasting money? Did you over-invest in a university education and under-invest in networking? Did you skip classes in the school of hard knocks?

What does your personal profit and loss statement and your balance sheet look like?

Not everyone needs to start a business or turn into an entrepreneur.

But to thrive in a capitalist world, it pays to sometimes think like one.

5. Turn yourself into a company

That said, it’s actually not a bad idea to become a company if you can.

I don’t mean you need to give up being a doctor or a programmer or whatever you are, in order to launch a rival to McDonalds.

But if you can you do your job as an independent, one-man band – a freelancer or consultant or small business owner – then there are plenty of advantages:

• You’re in control of your time and your productivity.

• With a diversity of clients (at least two!) you’re less exposed to the cost cutting measures of your capitalistic taskmasters. (i.e. Getting fired.)

• You’re usually taxed more attractively.

• It’s easier to put large amounts of money into a personal pension.

• No more idiotic office politics.

• If you invent something, you’ve a better chance of owning and exploiting it.2

There are some disadvantages, of course.

When you run the show you can’t slack off, and the freelance and consultant budget can be the first to get chopped in hard times. Put money aside in case.

There’s also more paperwork, and you may need an accountant.

In many countries you’ll need to budget for healthcare, too, although in the UK we have the NHS to show for our taxes – a boon that’s often underestimated by UK entrepreneurs.

The next step beyond being a one-person show – running a proper, expanding business – is obviously gold stars and top marks when it comes to being a capitalist. Instead of making someone else rich, you have people making you rich.

Marx would say you’ve turned the tables. Now it’s you exploiting labour for your own profit – which is a result for our purposes.

Besides, there’s nothing to stop you implementing profit sharing or other enlightened benefits should you want to be a conscious capitalist.

It’s hard to start a business – much harder than some pundits with books to sell will tell you – and it’s risky.

I think becoming a self-employed problem solver is a good halfway house.

6. Create multiple income streams

Another baby step towards being the J. D. Rockefeller of your neighbourhood is to look for ways to add to your primary income.

Can you teach a musical instrument or a language, or some other skill? Could you invest in a franchise alongside an ambitious niece or nephew? Do you have expertise that would enable you to trade antiques for a profit? Could you write and publish your own digital books?

The list is very long, and your hours will be longer than Joe 9-5, too, so try to pick something you enjoy.

The benefits of adding extra income streams are you diversify your earnings, you can save and so invest more, and you think of yourself even less as someone with a job, and more as an entrepreneur. Mental beliefs are an important part of the picture here.

Don’t dismiss the value of even small amounts of extra income. Any additional passive income streams are valuable when you think of all the capital it would take to earn the same return in a low-interest rate world.

7. Diversify, diversify, diversify

Capitalists know the world is changing fast. Rather than moaning about it, they look for opportunities.

If you can address a strong need someone has, then they’ll pay you for it. Over time we get most of our new gadgets, services, and vices like this.

But that same rapid change that capitalism thrives on – and indeed fuels – is also a threat.

Sentimentalists think we should still be making all our own cars, washing machines, and aeroplanes in factories in each individual country.

Capitalists know global trade has (rightly) ended all that, but they also understand it could be their business that is “creatively destroyed” next.

Rather than hope that laws and regulations can protect your industry – let alone assuming you’ll have a job for life – it makes sense to diversify your skills, knowledge, investments, and other assets.

Be ready for total upheaval, because the chances are it will come at least once in your lifetime.

Getting the right balance is tricky, because capitalism rewards specialists – up to a point. They are more efficient, productive, and usually do a better job. But that also makes them expensive, which increases the chances they’ll one day be replaced by a robot, or cheaper talent in India.

I’ve personally tried to be a generalist for this reason. The alternative is to keep on the cutting-edge of your speciality, to stay young-minded, and to continually seek education and new opportunities.

Don’t fight inevitable change. Just ask the old music label bosses undone by digital file sharing, the engineers replaced by Japanese assembly lines, the IT managers whose jobs have been lost to The Cloud, and so on and on and on.

As for assets, old money diversifies, spreading its wealth. Many new rich people keep it all in one or two assets and either become a lot richer, or go bust.

8. Become an expert asset allocator

One huge reason capitalism works is because it harnesses millions of people’s individual decisions about where to put their capital and effort to best use, as well as what to spend it on.

In communist Russia, comrade Igor and factory chairman Alexander had to decide how many tractors the company would produce in five years. They’d consult with higher-ups in the party and local farmers, and be told there wasn’t enough steel anyway because some other comrade who ran the steel plant was pessimistic and had turned to drink.

These people were just as smart as us, but the system was stupid. They didn’t have the information required to best allocate their resources.

Capitalism replaces all this guesswork and centralised control with prices, which reflect supply and demand. Capital flows to the places where it has the best chance of multiplying, for a given level of risk. Prices of goods and assets change to reflect this.

The system is far from perfect. Despite what academics need to believe to make the sums work, none of us is ultra rationale. Amongst many other things, we get greedy, we get fearful, and we don’t always have perfect information.

As a result, capitalist economies have booms and busts.

Sometimes certain assets and opportunities are too expensive, while others are a steal. Capitalists can make mistakes at knowing which is which, just like two comrades could disagree on the national cabbage target for 1956.

Your job as a capitalist is to try to do a better job at telling the difference between cheap and expensive opportunities. You want your money – your capital – to be in attractive and sustainable places, and you want to pull some or all of it out of areas that look too frothy or, conversely, look doomed.

You don’t want to invest in flaky stocks at the height of the dotcom bubble, but equally you don’t want to retrain as a horseshoe fitter the year before Ford takes motor cars mass market.

Try to be alert to the relative attractions of cash, bonds, shares, overseas markets, and the other assets you invest in.

This is easier said then done, and many investors find they’re better off adopting a passive approach to their portfolio, periodically rebalancing to ensure they don’t become too exposed to fads. This method automatically puts money to work in the unloved – and under-priced – opportunities.3

There are allocation decisions to make outside of your share portfolio, too.

Stuck in a country lane for two hours on a Friday night? Maybe it’s time to sell your holiday home. A third person asks if they can buy your antique Aston Martin? Perhaps you should sell it. Can’t sell your Spanish buy-to-let for love nor money, despite deep price cuts? Maybe you should be a buyer, not a seller.

You might not want to sell granddad’s medals from the war (I’m always amazed by how people on the Antiques Roadshow will swap precious heirlooms for two weeks somewhere sunny) but otherwise, all your assets should have a price where you’d sell.

And a price where you’d buy back in!

9. Be flexible

Be open-minded. Money doesn’t care where it’s put to work, and nor does a capitalist, beyond legal considerations and your own ethics.

How many people have daydreamed about opening a cool coffee shop? Countless – there are even books on it. I’d suggest there are probably less over-supplied areas to look towards if you want to get into retail or restaurants. Think creatively.

Workers tend to pigeonhole themselves, whereas capitalists are business people first and foremost. Richard Branson is again the supreme example – he’s not just the record shop guy, the airplane guy, the fizzy drink guy, or the financial services guy – he’s all of that and more.

Stay alert to opportunities. They come up in strange places.

As a freelance I earn most of my money from something that began as a hobby when I was doing something else, and I have various other income streams that deliver the same again from assets I own.

I’m not Richard Branson. But I am a capitalist.

10. Minimise your taxes

Capitalists believe that free markets – and companies and consumers expressing their choices and voting with their wallets – deliver the most productive allocation of humanity’s resources.

That’s not to say markets necessarily deliver the “best” allocation, because the word “best” is so subjective.

I’d personally prefer half the money spent on cheap clothes in Primark went on conserving the world’s rainforests, for example, but few shoppers would agree.

What if 90% of people in the world got 100% richer but 10% got 50% poorer – would that be good or bad?

If you were one of the unlucky 10%, you’d probably think it was bad.

What if that 10% wasn’t at the bottom of the pile, but rather they were the richest? Is your answer different now?

This sort of conundrum – invariably combined with self-interest – is why even close friends rarely entirely agree about politics and economics.

I have dear friends who will find this whole post horrendous! The fact is though that I believe the private sector will deliver better outcomes in most cases. Even for some thorny issues. In my ideal world, beyond a safety net for all citizens, government is mainly about setting the rules for society to get the results the majority want.

Cleaner lakes and rivers? Less fat cats in the boardrooms? More houses? Fewer people dying of heart attacks? The State doesn’t need to make that happen through the public sector. Change the rules and set the right incentives, and smart entrepreneurs will find a way.4

The logical conclusion is that a capitalist believes she knows better how to spend her money than the State does. Money is better off in our hands.

It’s a legal requirement to pay your share of the taxes, and I’m not suggesting otherwise. But there’s a big difference between tax evasion and tax avoidance.

A capitalist doesn’t donate money to the public purse – not when he or she believes it’s better being put to work by hungry entrepreneurs and companies. I don’t believe in a zero-sized public sector, but with the government already taking more than 40% of the UK’s GDP, I think it’s got enough to be getting on with.

Besides, if you’re taking the risks, why should the State take a big slug of the rewards?

Always take into account capital gains tax and taxes on income. Paying high taxes on your investments makes a big difference over the long term.

11. Give something back

My comments about taxes may have riled some readers, but I’m not praising personal gluttony and excessive hedonism.

I’ve not once mentioned driving sports cars, bathing in the milk of alpacas, or guzzling expensive champagne with high-class strippers (whether Wall Street asset strippers or the more traditional variety).

Although who wouldn’t want some that now and again? Perhaps not all the same time.

Whatever, it’s a personal choice that has nothing to do with capitalism. Many communist and socialist legends could spend money with the best of them on the backs of the workers. Plenty of capitalists have been wildly greedy, but Bill Gates has devoted the rest of his life and fortune to philanthropy, and Rockefeller didn’t drink or smoke.

Nobody succeeds in a vacuum. A healthy, educated population, family and friends, infrastructure, and the rule of law – none of this comes cheap. That’s why I’m happy to pay a fair share of taxes, and why I think it’s good to give something beyond that to causes that are meaningful to you.

Plus it feels good to spend your money helping others.

Some of the greatest modern mega-capitalists including Gates, Warren Buffett, and Mark Zuckerberg have pledged to give away at least 50% of their fortunes to philanthropy. Others work behind the scenes – and yes, a few inevitably want their names above the wing of a hospital or library.

Who or what would you like to help if you were wealthy?

Thinking about it might just help you get there.

1. Because I believe in equal opportunity I’d support higher inheritance taxes, unlike my supposedly socialist friends who bemoan the taxes the State will claim when their parents in the Cotswolds conk out [↩]
2. Check your contract. Many terms of employment stipulate your employer owns everything commercial you think up – even if it’s unrelated to your day job! [↩]
3. Passive investing is the ultimate way to trust in the wisdom of the market, making passive investors uber-capitalists, whether they like it or not! [↩]
4. Don’t blame capitalism that we don’t have a perfect and fair world. The fact is people don’t vote for a lot of things that would be better for everyone in the long run. [↩]

Trying to settle on an asset allocation is a classic cause of analysis paralysis. Financial industry talk of efficient frontiers, mean variance analysis and allocations customised for your unique circumstances can lead you to believe there’s a perfect recipe out there – some financial equivalent of the Ancient Greek’s golden mean.

Sadly, you can only know your ideal asset allocation in retrospect. That’s because nobody can predict with any degree of certainty which combination of asset classes will deliver the best returns after one, ten, or 20 years.

The proper goal of asset allocation is to pick a diversified combo of investments to see you proud in most circumstances. The mix should suit your:

• Investment goals.

• Attitude to risk – can you handle it when the market tanks?

• Time horizon – might you be forced to sell up at the worst possible moment?

In a minute I’ll run you through a simple method to create a robust asset allocation. We’ll consider what questions you’ll need to ask yourself along the way and some of the rules of thumb you can use to narrow down your answers.

But before that we need to do some spadework.

Asset allocation preparation

You need to know what you’re investing for. Specifically, some hard numbers:

• How much do you need?

• In how many years will you need it?

• How much will you save towards your goal?

• What return can you expect from your investments?

Spend some time thinking about those numbers. The result will be a plan that can be adapted to any investment goal.

Don’t worry if your numbers are a little hazy. Investing is like piloting a ship through the fog. We will make a few course corrections along the way. For now we just need to know roughly where the land lies.

You don’t have to consult your local mystic to work out your return number, either. We’ll get that from the historical record and a smorgasbord of sources that have analysed current valuations. This number will be wrong, but it’s the best we can do and is no more likely to be wrong than anyone else’s best guess. (I’ll write more about this in my next post).

Your return number will be heavily influenced by the combination of equities1 and bonds2 that suits your risk tolerance. Together, equities and bonds are the rocket fuel and crash bags of a diversified portfolio.

• Equities generally deliver decent growth, but occasionally they destroy value like a shredder that suddenly grabs your fingers.

• Bonds generally offer stability and low growth, and help to cushion your portfolio when your equities fall.

Traditionally, 100% equities is the preserve of beings with an emotional temperature near Absolute Zero. Meanwhile 100% bonds is reserved for timorous burrowing creatures who cannot bear loss of any kind.

Most people lie somewhere in between.

Your place on the spectrum is impossible to know with any confidence until you’ve received your first shoeing in the market. The industry uses risk profiling tests in the absence of other evidence, or you could try the risk tool here on Monevator. We’ll also offer an even cruder approach below.

Ultimately, the amount you invest multiplied by the compound return you receive will equal your big number in X years.

If X years is likely to be less than ten, then you’d be very unwise to commit all to equities. More on this below.

Beware too that if your required return suggests an equity allocation above your risk tolerance – or higher than the expected rate of growth – then you’re heading for the rocks.

Rather than ignoring the red warning light and slamming the risk lever to Max Equities while hoping not to crash, you’d do better to save more, reduce your big number, or plan to take longer to reach your destination.

Choosing your equities

Most people must invest in equities because their goals require a rate of growth they’re unlikely to get from bonds, cash, or any of the gentler asset classes.

Equities are inherently risky, so passive investors diversify as much of that risk away as they can by investing in the broadest pools of shares possible.

By doing so, we avoid taking bets on individual companies, industries, countries or regions that could sail down the Swanee.

Instead, we invest in the most diversified equity line up available – the World Stock Market, which currently looks something like this:

Region	Allocation (%)
North America (US & Canada)	52
UK	8
Europe	17
Pacific inc Japan	13
Emerging Markets	10

Source: iShares MSCI All-Country World Index (ACWI) ETF

This diversified global portfolio represents the aggregate buy and sell decisions of every investor operating in the world’s major stock markets.

In other words, it’s the best approximation we have of where Planet Earth’s finest investment minds are allocating their capital. As we probably don’t know any better than them, we should do the same.

If you’re a 100% equities buccaneer then you could do worse than replicating that allocation, which is easily done by putting your money into an All-World ETF like Vanguard’s VWRL.

However, few investors want nor need nor can handle an all-in equity allocation.

Bring on the bonds

The point of bonds is to dilute the riskiness of equities. So we want the least volatile bonds around:

• High-quality government bonds – ideally nominal short to intermediate maturities, or short index-linked. 

• From your home country – gilts for UK investors. Or global government bonds hedged to GBP. 

• You can use individual bonds or bond funds.

What percentage of your portfolio should be devoted to bonds? Again, there’s no correct answer to that question. It depends entirely on your personality, goals and financial situation.

But we can throw a rope around your number using some general principles and rules of thumb.

Remember, we’re only investing in equities because we need the growth they offer over the long term. If you owned an orchard of money trees and waded through bank notes like autumnal leaves then you wouldn’t have to bother with all that nasty stock market crash business.

So if you don’t need much growth (say just 0.5% to 1% real return per year over the next ten years) then you can hugely reduce your reliance on equities.

In other words, if you’re more interested in capital preservation, then a strong allocation to shorter-dated conventional gilts and index-linked gilts makes sense.

Associated rule of thumb: 100 minus your age = your allocation to equities.

If you need the money soon then equities are a big risk. And by “soon” I mean anytime in the next ten years.

Equities have a 1-in-4 chance of returning a loss inside any five-year period and a 1-in-6 chance of handing you a loss within any given ten years, according to the analysis of Tim Hale in his superb book Smarter Investing.

So do not allocate 100% to equities if you will need all of your money within that period.

Associated rule of thumb: Own 4% in equities for each year you’ll be investing. The rest of the portfolio is in bonds.

If you don’t need the money at all then you can happily increase the risk you take.

For example, if your living expenses are amply covered by income streams such as a defined contribution pension and the State Pension then you could easily up the equity allocation as a proportion of your assets.

If equities plunge in value then no matter, you can ride out the dip and enjoy the upside whenever a recovery comes.

However, your risk tolerance is the house that rules all.

Risky business

You can have all the money in the world, but if you can’t bear to see a chunk of it consumed by a crisis of capitalism then you should avoid a large dose of equities that could cause you to panic at the worst possible moment.

The nightmare scenario with any asset allocation is that it’s too risky for you. If you sell when markets plunge you’ll lock in losses and permanently curtail your future returns.

Therefore an untested investor is advised to think conservatively – opt for a 50:50 equity-bond split until you know yourself better.3

Sadly, your risk tolerance is a moving target. It’s known to weaken with age and the amount at stake. Therefore even a tried-and-tested investor should reassess their allocation from time to time and consider lifestyling to a lower equity allocation as they age.

Associated rule of thumb: Think about how much loss you could take. 50%? 25%? 10%? Write down the current value of your investments. Cross that figure out and replace with the amount it would be worth after enduring your loss.

Could you live with that if it took 10 years to recover your original position? Limit your equity allocation to twice the percentage amount you can stand to lose.

William Bernstein, in his wonderful book The Investor’s Manifesto, provides handy instruction on how your risk tolerance might modify a rule of thumb like “your age in bonds”:

Risk tolerance	Adjustment to equities allocation	Reaction to last market crash
Very high	+20%	Bought and hoped for further declines
High	+10%	Bought
Moderate	0%	Held steady
Low	-10%	Sold
Very low	-20%	Sold

The rules of thumb aren’t magic amulets. They ward off no future disaster. They are only road traffic signs that will hopefully guide you to the right destination at a relatively safe speed.

Here’s one final rule of thumb: the 60:40 moderate equities and bonds split. It’s become the default industry standard for the ‘don’t knows’ or ‘Joe Average’.

Inflation, deflation, and cash

Remember that conventional and index-linked bonds perform different roles.

Generally, index-linked bonds protect you against inflation and conventional government bonds perform well during recessions and times of deflation. Many people split their fixed income allocation 50:50 between the two.

You can also devote a proportion of your bond allocation to cash.

Cash is vital for short-term requirements– such as paying the bills – but as an asset class it has historically under-performed bonds over the long term. (Nimble private investors prepared to continually chase the highest rates may do far better than average with cash, however.)

Press play to continue

Once you’ve thought through your equity/bond split, you’ve made the asset allocation decision that will have the biggest impact upon your ultimate returns from investing.

The hard work is potentially over. If you like, you can now draw a line under the process – or outsource the fine details to a one-stop, fund-of-funds like Vanguard’s LifeStrategy series

Keen to go further? Then you can carry on tweaking your asset allocation in search of further diversification and return premiums.

Fine-tuning with property, risk, and global bonds

The following advanced moves should all be taken from the equities side of your allocation.

Global property is the halfway house between bonds and equities in terms of growth and volatility. The performance of commercial property isn’t highly correlated to either of the main two asset classes so it adds a smidgeon of extra diversification.

Allocations to property generally lie between 5 and 20% of the portfolio – typically 10%.

Risk factors are the few slivers of global equities that have a long track record of delivering market-beating growth. They also have a long history of delivering increased volatility, and there’s no guarantee they’ll continue to perform well in the future.

Well known risk factors are value equities and small caps. If the future looks like the past then you might expect a factor like small-value to deliver an extra 1% real return per year (after fees) over its equivalent broad-based index, such as the FTSE All-Share.

But you’d also be throwing in an extra 20% more volatility. Be sure you can handle the risk, or compensate by increasing your bond allocation.

To add risk factors to your asset allocation, divide your regions into broad market, value, and small cap allocations.

For example, 20% UK equity allocation becomes:

• 10% UK equity
• 5% UK value
• 5% UK small cap

Better still, the value and small cap slices can merge into 10% UK small-value.

Global corporate bonds of varying yields and maturities add an extra source of diversification, but should be taken from the equities side due to volatility concerns. Consider a 10% – 15% allocation.

In Smarter Investing Tim Hale allows for an allocation to the most stable corporate bonds – short-dated, domestic currency, investment grade – to be taken from your fixed income allocation rather than equity, as they are not unduly volatile.

Finally older investors may wish to tilt their equity allocation towards their home territory to reduce currency risk. The downside is you’ll be taking a bigger punt on your domestic market.

Further ideas

It’s absolutely fine to carve out your allocations in big 5 – 10% blocks. The odd fiddly percentage point here and there will make little difference to your final score.

I’d avoid adding so many sub-asset classes that you end up with a raft of sub-5% allocations. It just adds unnecessary complexity for negligible gain.

Most investors use model portfolios to help firm up their ideas. Some we’ve written up include:

• Different asset allocations for different types of investors.

• Investment portfolio examples from some of the investing greats (and us).

• Our own Slow & Steady model portfolio.

You’ll find there’s a good range of low cost index trackers to cover almost any of the asset classes you might choose.

Take it steady,

The Accumulator

1. Equities are shares in companies, hence their alternative name of shares. Americans call them stocks. [↩]
2. Bonds are debts. By buying them, you effectively lend a government or company money. It pays you interest and (usually) returns a capital sum after a fixed period of time. [↩]
3. The Investor has even suggested 50:50 equity-cash for new investors. [↩]