Q: Hi there, do you guys have a basic formula for diversifying one’s assets into various classes based on age and/or other criteria and what do you believe to be the main asset classes? Also, what portion of equities do you suggest that a South African resident should hold in international shares and should these be split between developed and emerging economies? I know there is no “one size fits all” formula but I am looking for some guidance.
Thanks for your assistance.
A: Totally unexpected set of questions sent to FirstStep.me - so we tracked down Daniel Weston (Founder and Chief Investment Officer of Aimed Capital) to answer it for us!
Daniel Weston: There is no one size fits all of course, but in my opinion the conventional portfolio asset allocation model has got it all wrong....I don't allocate assets by dollar amounts, I do it by risk....
Risk in my eyes is essentially volatility. So you want to have equal spreads of volatility. Meanings much more bonds (less volatile), less equities (more volatile), and small amount of commodities (very volatile). So it could for example be, 60% bonds, 30% equities, 10% commodities, for EXAMPLE! What this would do is put "positive economic data" and "negative economic data" assets in equal amounts of risk (volatility) - does that make sense?
Google "risk parity" and it may provide some interesting reading! Would love to reply longer but I would end up writing a book!!
I run my own portfolio's by looking at economic fundamentals first and foremost, and trading around that, but then once I work out what I would want to own, I allocate it by how volatile those assets are on a daily moves basis.
My advice is most likely no better than any others, because we can't tell the future, but worth thinking about. Managing risk is the most important thing to do, so that we put the probability of making money and protecting money at the same time on our side!
Connect with Daniel on Twitter or visit danielweston.com for more information.