Take Lots Of Risk, Or None At All? My Portfolio Allocation for 2016

Ask any mutual fund manager why you should invest with them, and you’ll likely find yourself met with a barrage of sales points, all of which will underscore one takeaway—their fund deserves lots of your money.

So why then do over 8,000 mutual fund managers have less than $100k invested in their own funds?

I think it’s important that I have skin in the game. If I don’t believe in our funds enough to invest my own money here, why should anyone else? So for better or worse, I invest all of my liquid assets in funds I manage. (Not to mention many funds have sales loads, 12b-1 fees, and keep the short lending revenue! Avoid!)

Lots of managers like to talk their book on TV or in print, but clam up when you ask them about their own portfolio.  Next time you talk to your advisor or money manager, ask them “How do you invest your own money”?  Taking it one step further, I publish my allocation each year so people can follow along with how I think, and more importantly, see where I invest.  I’ll provide you my 2016 allocation in a moment (as well as links to 2015’s and 2014’s). But before you dig into the numbers, some context will be helpful.

Only a small part of my personal net worth is tied up in market-sensitive assets. The vast majority of my net worth is concentrated in my asset management company Cambria, followed by farmland, then two private companies, then my investment portfolio. (And an even smaller percentage is dedicated to angel investing.)

Given this, the returns on my investment portfolio will have little effect on my total net worth. If my investment portfolio declined 50%–even 100%–it would not have a significant impact on my overall personal finances. (Though there is likely to be correlation between the holdings with the exception of perhaps farmland.)

Given this limited effect, the approach to my investment portfolio could go one of two opposite ways, depending on the psychology and emotional makeup involved. Both are valid.

1 – Be as aggressive as possible since I am young, and have a lot of human capital left, or

2 – Take no risk at all, since the outcome of my net worth will largely be determined by the larger investments in my company, farmland, private investments etc.

Which would you choose?

Even though taking no risk is completely valid (whatever lets you sleep at night), I prefer a moderate risk portfolio that targets higher returns than buy and hold with lower volatility and drawdowns – quite a tall order!  So as that translates into my current allocation of market-sensitive assets, I have about 45% of my assets in tactical or trend following strategies. The 55% majority is in long-only strategies.

This works for me because, if you’ve read my blog for a while, you probably know I’m a trend follower at heart, yet also a value investor. As a value investor, I want exposure to assets that may be cheap over long horizons (like foreign stock markets now). But as a trend-follower, I like the idea of having half of my portfolio available to move to cash or hedges if markets trend down (like now).

Cambria’s two tactical funds are mostly in cash or hedged right now. So even though I have a moderate risk profile, my portfolio currently appears quite conservative with roughly half of the overall portfolio exposure in cash or bonds.

I plan on increasing the long only component if foreign markets continue to decline, but in general, I’m shooting for 50:50 (which resembles the Trinity Portfolio article I penned earlier).  So if stocks decline by another 25, 50, 75% you will see the long only component increase next year.

Moving on, we have two new ETFs set to launch this month in which I’ll be investing.  I’m not sure if I can mention them yet so I will update my allocation again when they are live.

By March 1, my 2016 allocation should be roughly…

Broad Groupings:

• Tactical or Trendfollowing Strategies 45%
• Long Only Strategies 55%

Within those categories:

• Tactical – Trendfollowing 45% (GMOM 30%, VAMO 15%)
• Long – Foreign stocks and bonds 42% (GVAL 25%, XXXX 7%, XXXX 5%, FYLD 5%)
• Long – Global Allocation 10% (GAA)
• Long – US Stocks 3% (SYLD)

If you’re interested in reviewing my 2015 and 2014 allocations, click here for 2015 and here for 2014. They are very similar and little has changed in the overall picture.  (The strategies in the old hedge fund have been turned into the various ETFs which should be a more liquid and tax efficient vehicle.)