Calculating total wealth and asset allocation

Investing / Portfolios
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I am curious how other people calculate their total wealth and how they implement their asset allocation strategy.

At first, this seems straightforward, but there are actually several decisions to make. E.g.: Pillar 3 and 2 money will be taxable (include future taxes?), Pillar 1 (include this? when will I die?), etc. All this is further complicated when one also has assets in another country with its own investment vehicles and tax rules.

Another consideration is asset allocation… once one has decided on values (current, projected, tax-discounted, etc.) for each asset, one can categorise them. For example, one can separate things into these 5 categories of increasing risk and aim (and maybe fail ) to maintain a certain percentage of each, e.g.:
a) 10% cash
b) 10% bonds
c) 50% real estate
d) 25% broad market (ETFs, mutual funds)
e) 5% sector ETFs / individual stocks

(yes I know that some would move real estate further down the list… :upside_down_face: … and others not present here would have a category f for put options, etc.)

Personally, I do not include future taxes on Pillar 2 and 3, and don’t count pension (Swiss OASI and foreign equivalents) in net worth calculations. I count Pillar 2 as bonds. And any ETFs like health care or automation or emerging markets or whatever get assigned, with individual stocks, to the last category.

There is obviously not one single way to do these types of calculations… and some might actually do their asset allocation strategy completely outside their Pillar 2/3 money. Curious to hear about other methodologies (and I’m sure many here would jump at the chance to tell the world about their amazing spreadsheets…).

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I work actually with an asset allocation the following way:
25.1 % CH Stock
12.1 % EUR Stock
2.8 % UK Stock
4.6% SE Asia ex JP Stock
2.8 % Emerging Stock
4.7 % Japan Stock
37.2 % US large
3.6 % US Small
5.6 % Bonds (mostly CHF)
1.5 % Cash
The definition of the market is mostly given by the FTSE index.
Yes, Switzerland is overponderated. For historical reasons, better knowledge of the swiss market and a bit of tax advantage. The ETF are mostly Vanguard based in Ireland but there is also some ETF from Blackrock and Comstage. In the swiss market the ETF is based in Switzerland and I am holding some shares directly.
I keep track of it using an accounting software and a spreadsheet. The accounting software is there to help to keep track of the cost, cash flow from dividend and portfolio structure. The spreadsheet is there only to assess the portfolio structure. I made some wisely timed re-balancing thank to the spreadsheet and I am convinced this system helped a bit to buy in the dip.
The allocation was not always like that and there has been some re-balancing due to change of allocation, mostly to optimize the long term return.

3

Interesting, so you are basically making your own world equities fund where you control relative weightings.

But isn’t this just what you hold in your brokerage account (i.e. immediately liquid assets)? What about your 2nd Pillar (or real estate if you’ve emptied it to buy a house) or 3rd pillar?

I was moreso asking about how people categorise their wealth when they sum it all up… e.g., If someone has 20% of their wealth in a Pillar 2 but wants to have their money in 80% equities, then they wouldn’t hold any bonds in their Pillar 3 or investment accounts.

4

Yes, this is liquid assets. On the side of this there is a third pillar, a second pillar and a small multi apartments house. But because all this is not liquid it is just outside of the strategy. Why bother for things where you can’t do that much anyway. You could also make the comment that I am too much invested in the stock market but this is balanced with my other assets. Finally for me the question is not about balancing but more about is it safe and I think that the answer is positive.

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Yes, but when summing up your total wealth, the pillars and real estate do actually count, thus you are not really 92.9% in equities. Would your portfolio strategy be different if you didn’t have those other assets?

6

I think my strategy would not be that much different as long as I have a job and a salary. I do not think that lending money in bonds or deposit is a good thing to do and it is not even very safe. A bank lending money has a return on own capital about ten times higher (because of scriptural money) than me when I lend my money. I prefer to stay out of this game. The reason to pile up money in a deposit or in high quality bonds is if within the next 2 or 3 years you have a project specific (building a house, financing a company,…).

7

Hi everyone,

I am resurecting this topic :smiley: I will probably need to account my own appartment in my asset allocation and I was wondering which approach is the right one:

  1. Account my RE as the net sum of the total value - the debt → 200k Equity on a 1 Mio purchase
  2. Account the total value of my RE in the asset allocation for the purpose of the calculation of the asset allocation → 1Mio as part of my RE allocation (=200k Equity + 800k RE debt)

I would tend to consider alternative 1. for the sake of Net Worth calculation and method 2) for the sake of asset allocation calculation. The reasoning beahind 2) is that I could have contracted debt for an other purpose (for exemple margin loan for investment in shares or obligation) and that the total amount of CHF that I can allocate is the total amount of CHF (not net from the debt I own).

Does that sound correct to you? I am probably not the first one to think about “how to account its RE in his asset allocation” :smiley:

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  1. Not account for it in the asset allocation.

We have bought an apartment for living, not as an investment, so I don’t know and don’t care how much exactly it is worth. I am also not investing in RE, because from the risk (volatility) - returns profile it is between stocks and 2nd pillar/cash.

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9

I’ve thought long about it and went from 1 to 2 in my models. I’m not a homeowner yet so take my opinion for what it’s worth. That means full asset value under the RE assets and the debt value as a liability, a.k.a. a negative cash position.

The reasons for that is that I don’t think the debt is tied to the real estate. If my bank asked me to come up with cash to cover unexpected amortization due to negative changes in economic conditions, my options wouldn’t just be to sell the house, I could sell any asset to come up with it (and probably would). It also doesn’t make sense to keep assets with lower expected returns than the interests of the debt. I’d, in particular, liquidate any cash position (minus EF) and probably any bond position, including 2nd pillar, depending on the interest differential between them and my mortgage. In the end, the mortgage affects the whole portfolio and not just the real estate part. To me, the portfolio is in actuality on margin.

To Dr.PI’s point, accounting for the value of my own home in my net worth means I am ready to sell it if needs be. That in turn means that I should account for an equivalent rent as I would be paying otherwise in my expenses (from which I can deduct the costs I have to cover my own homeownership). Not doing so would be counting it twice when it comes to the 4% rule: as a reduction of expenses and as available capital to finance the retirement.

Edit: forgot to mention the counterparty for the virtual rent expense: I would also add a virtual income since I would be the recipient of the virtual rent. So:

  • I’d count the whole value of the RE as an asset for my net worth, because I’d be willing to sell it if I needed to, to finance my retirement/expenses.

  • I’d count the mortgage as a negative cash position since any liability coming from it could and would be repayed by selling any asset in the portfolio.

  • I’d add a virtual expense of the amount of the rent I’d have to pay if I didn’t live in my own home minus the costs of homeownership (mortgage interest, insurances, taxes, renovations, others - not amortization, that’s a saving/switch in allocation, not an expense).

  • I’d add a virtual income equal to the virtual expense above to balance it. I’d consider this a return on investment for the home asset.

That way:

  • I can use the 4% rule (with the caveat that RE wasn’t part of the allocation used for the Trinity study - nor was it considering expenses in CHF for that matter).

  • My net worth is accurate.

  • I can calculate a return on investment and/or expected returns for all/most my assets, to determine the financial sense they make in my portfolio given I’ve gone on margin by taking a mortgage.

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10

@Wolverine thank you very much for your comprehensive answer that makes a lot of sense. That was exactly what I was looking for :ok_hand:

@Dr.PI : Your home is probably a large chunk of your net worth. It doesn’t sound right to neglect such a large part of your net worth in your asset allocation. You might end up with a too conservative portfolio with regard to your risk tolerance.

Thank you both of you for your thoughts!

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