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Asset Allocation: Everything Everywhere All at Once?
Nothing like a bear market to prompt some reevaluation of portfolio exposures. By Benjamin Tan
I spent the MLK weekend doing quite a fair bit: celebrating my mother-in-law’s birthday, reading the book All About Asset Allocation by Richard Ferri, planning the next iteration of my manuscript, playing pickleball, engaging on Commonstock platform on a recent post I did on confirmation biases, doing yoga, meditating, playing cards, running errands with my husband, and doing our semi-annual combined portfolio analysis.
No wonder I felt tired after my in-law’s left on Monday morning. I was doing everything and being everywhere. But I also felt it was a good weekend for the same reasons. My time was spread across various activities, some within my comfort zone, others outside. I shall not be saying which ones were outside!
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All About Asset Allocation
All About Asset Allocation by Ferri is not a new book - the second edition was published in 2010. I wanted to have a different frame of reference while performing my portfolio evaluation and, at the same time, get some inspiration for my manuscript.
The book advocates a healthy split between equities and fixed-income, together with consistent rebalancing. It discourages too much stock picking, in case we are fooled by randomness.
I learned some lessons from the weekend portfolio exercise. More than a few of my positions turned out to be higher correlated than I thought, albeit noting 2022 to be a bad year across multiple asset classes. Still, my portfolio can benefit from more diversification (old economy vs new; value vs growth; income generating vs non-income) going forward. But staying the course is also key. According to Ferri, a bear market is not the time to do any major de-risking. Unless an investee company is heading into a liquidity crunch or facing existential crisis, it is better to at least stay put.
Poster Child of Growth Investing and Doubling Down: Cathie Wood
Few fund managers have drawn more recent ire (or infamy) than Catherine Wood of Ark Invest. Famed for her early call on Tesla (TSLA 0.00%↑) before it even ramped up Model 3 production, Wood is all about investing in a world to come. You will not hear her preach Costco (COST 0.00%↑) or, god forbid, Saudi Aramco. Ark Invest envisages grocery deliveries via drones and a fossil-free future.
And so Wood's ETFs have all underperformed by a large margin since markets rotated out of growth. Peak to trough, her flagship fund ARK Innovation ETF ARKK 0.00%↑ fell from $150+ per share (reached in early 2021) to the current $30 range. Both Costco and Saudi Aramco have held up much better than her funds over the same period.
To no surprise, Catherine Wood is staying the course. She will not be switching into Coca Cola (KO 0.00%↑) or fixed income anytime soon. Her stomach for risk is evident as she continues to average down in this bear market. Ark Invest has a clear mandate to invest in future-oriented companies, even though it implies very high volatility due to their close-knitted correlations. Many have accused Wood of mismanagement and irresponsibility with such an extreme skew in asset allocation.
No one know what is going to happen to her funds - only time will tell. If interest rates fall and her portfolio companies cross the chasms to become profitable giants, Ark Invest funds will rise in tandem. But who knows.
Diversification: It is Up to Individuals
As individual investors, however, capital allocation is up to us and within our control. I often do a double take when I witness people managing their entire personal portfolios like Catherine Wood, focusing only on high-growth companies. No Big Tech. No real estate. No fixed income. No old economy stalwarts. No dividend payer.
Perhaps they have specialized knowledge, which gives them reasons to run concentrated risks involving just a few growth stocks. But even Ark Invest, with an army of highly qualified staff across multiple disciplines, holds anywhere between 35 and 55 positions in each ETF. Maybe their partners hold much more conservative portfolios which provide the necessary counterbalance?
Like my MLK weekend, I prefer to mix it up in my portfolio. Doing the semi-annual review with the book by Richard Ferri in hand and my husband by my side was useful. We are both invested in ARK Genomic Revolution ETF (ARKG 0.00%↑) but it also represents less than 1% of our combined portfolio. Neither of us have knowledge in this field, so we decided to allocate some capital to this ETF for some exposure. Other than that, we are pretty spread out, albeit with room for further improvement.
On reflection, asset allocation does imply Everything Everywhere for sanity. Not everyone has balls (or collects a fixed percentage of management fee based on assets under management) like Cathie Wood. Investors are often encouraged to hold diversified funds that invest across multiple industries, asset classes, and geographies.
But asset allocation need not be done at once. This is a lifelong process. Mistakes made in the past inform the future, and we can make multiple changes to our portfolios over market cycles.
Unlike the movie, we all have more than 139 minutes to reinvent ourselves and our asset allocations.
Confession: I have not watched the Michelle Yeoh movie, Everything Everywhere All at Once. It is now streaming on Paramount (PARA 0.00%↑) though and I just got the subscription over the weekend.
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