Learning from the Credit Crisis

The basis of my approach to investment is asset allocation coupled with fundamental valuation: choosing a diverse spread of assets and a price at which I’ll buy them.

This combination sounds a little contradictory, since asset allocation is the response to the perceived impossibility of deciding on price in a random walk down Wall Street: you can’t consistently outperform the market.

Whilst I don’t entirely subscribe to this sentiment, I believe it has good applications at the core of a portfolio comprised of these asset classes.

• Equity based mutual funds, diversified both by size and geographic region.
• Commodities based on ETCs.
• Geographically diverse corporate and government debt.
• Mutual funds directly invested in commercial property. If asset diversity is the goal, investing in property stocks doesn’t really cut it, they’re still equities.

This core represents about 80% of my portfolio, and I use fundamental analysis, alongside the actual asset distribution, as a method of timing my rebalancing and adding cash into the portfolio.

Fundamentals are key to actively managing the remaining 20% of my portfolio, which is mostly invested in UK equities, in the form of individual company stock, and both long and short index tracking ETFs.

This strategy remains unaffected by the Credit Crisis, but my execution has changed in two main respects; being honest with myself about objectives, and active use of cash within the portfolio. These will be the subjects for a couple of future posts.