Ah, finance. Always stable and predictable, with slight fluctuations to keep things interesting. Just kidding. We’re still mentally recovering from 2022 when Bitcoin and crypto imploded, inflation blew up, and markets crashed.
And now, with the fresh eyes of 2023, I’ll share the one thing I’m changing in my investment strategy and what I recommend for you as well.
So, what happened in 2022?
Well…. Crypto crashed at the end of the year. To be honest, I’m fine with that, because it seemed stupid from the start. Maybe it will come back, but at least it proved that it’s no gold equivalent. Hopefully, you’re not the one who got screwed.
What else… US stock markets dropped around 20%, so everything’s on discount. Bonds dropped around 15% too.
The housing market started crashing. Where I live, it’s down about 20%.
Oh yeah, and inflation finally blew up. I’ve been concerned about inflation in a big way for years, and I think it will still be a huge issue in the coming decades.
What are people expecting for 2023?
I think that most people are overly optimistic and still think that the stock and bond markets should shoot up. But…
- The housing market is expected to drop another 10% in 2023 because it takes a while for rate hikes to really work their way into sales prices.
- And crypto is dead. I’m not recommending anyone touch it.
So, do we put all our money in the stock market? NOPE.
How to make active management easy?
The people who actively manage their investments need to find better ways to spend their time. Wasting your time and energy poring over each stock, fund, or bond is not nearly as lucrative as investing in yourself or even working part-time. There are simple moves you could do instead.
By the way, don’t bother with selling a certain type of stock to reallocate into a different stock. That’s not tactical asset allocation, it’s a waste of time. For me, I only really think about messing with my overall balance about once a year and only on a big scale. Like reducing my bonds.
Even better, you could use automated investing, like pie investing, which is as easy as clicking a slider to redistribute your money. Plus, you can do it with no fees with trading platforms like M1 Finance.
Pie, you say? How does it work?
An easy example of strategic asset allocation is to have 33% of your money in stocks, 33% in bonds and cash, and 33% in real estate. But then, let’s say, one year you make the tactical asset allocation decision to drop all of your bonds and invest into housing and stocks. Then, over the long term, you would work your way back to the initial strategy of 33/33/33.
When to practice tactical asset allocation?
If you’re constantly messing around with your portfolio allocations, you’re likely wasting your time. Believe it or not, the world doesn’t change that fast and if you change your allocations every month you’re using precious brainpower that you could be dedicating elsewhere.
If you want a rule, I’d say reallocate your money every 6 months if necessary, but I really only do it once a year.
Categories to tactically allocate between
I really break it down into two categories:
- Bonds and cash
It’s always good to have some liquid assets, (something you can easily trade in for cash without a lengthy process) because they let you be more aggressive with other investments without fear of bankrupting yourself.
- High-appreciation leveraged real estate
- High-cashflow unleveraged real estate
- It’s worth differentiating the two because they achieve very different things for your portfolio. A high-appreciation leveraged home traps your assets but will bring a future payout; whereas an unleveraged home, with little or no mortgage, will bring you a monthly paycheck.
- Amazing risk-to-reward ratio
- A successful business is like printing money
These investments are what bring in the real money, but you can’t put all your money into homes, farms, and businesses without having some liquid assets as a cushion.
My own tactical asset allocation for 2023
Last year was crazy on a whole bunch of levels and it definitely broke some expectations of mine. So you would imagine I’d be changing things up for 2023.
I’m only changing one thing.
My ratio of liquid to illiquid assets has never changed since I was a wee lad investor. My current breakdown is:
I have a 70/30 mix of stocks to bonds
- I own enough bonds/cash to cover my lifestyle for 18 months PLUS any deficit that I couldn’t cover with other housing income if I had missing tenants for 18 months.
- When markets are low, I usually convert my bonds to stocks but markets don’t seem low to me right now and bonds took a beating this year, so they should rebound when interest rates start dropping.
This is where most of my money is right now. I have:
- $850K in an appreciation house with a $200K mortgage.
- $640K in cash-flowing real estate (both through unleveraged houses Crowdstreet.)
- $20K of US farmland, mainly because living in Canada makes it VERY hard to invest in farmland.
- My blog. It’s worthless, but I can’t help myself.
So what’s this one big change I’m making?
I’m selling off my cash-flowing houses and replacing them with downpayments on leveraged houses.
Why? House prices will be dropping, but cashflow house prices are still increasing since people use them as an inflation hedge. I’m concerned about inflation, but not so concerned that I’d turn down a 30% discount on a house.
In a perfect world, I’d actually sell all my cash-flowing houses right now, but then I’d be crushed by capital gains, so I’ll take it slow.
My 2023 recommendation for normal people
- Have a GOOD liquid emergency fund coming into this recession so that you feel confident about being opportunistic. I recommend having an 18-month bond runway and keep a 70/30 stock/bond mix.
- If you’re super future-minded, I would recommend buying appreciation-based houses since the prices are going down.
- If you have cashflow houses that you can sell at a high price, sell them off for appreciation-based homes.
2022 was weird for investing, but I won’t be changing my asset allocation much. Just selling off the houses that already paid off for downpayments on better houses.