Monday, June 4, 2007

Asset Allocation I

There are many different views and beliefs on the ideal asset allocation. What I’m going to attempt to do is simply state what I believe is the best asset allocation for my unique situation. Your personal allocation may be the same however, it will probably be different based on your own unique investment objectives, time frame and risk tolerance.

I’m going to deal with 2 elements of asset allocation:

1. Allocation amongst the asset classes
2. Allocation amongst countries (currencies)

I’ll begin with asset allocation amongst the classes. The most common rule of thumb is that ideally you should subtract your age from 100 and that is the maximum percent of your portfolio that should be in equities, with the remainder of your portfolio being in some form of fixed income (basically your age is the percent of your portfolio that should be in fixed income). So according to this rule I should be 27% invested in fixed income. For some this may be true, however in my personal situation I would ideally like to have between 95% and 100% of my portfolio invested in equities. I believe that over time equities will continue to outperform bonds. I am comfortable in an all stock portfolio due to my long investment horizon and the fact that I am willing to take the additional risks and portfolio volatility that come along with a 100% equities portfolio. Additionally, I am pursuing a dividend growth strategy to fund my future retirement so a large temporary decrease in my portfolio value will not affect my retirement income as long as the dividends payments are not reduced. I am aware that companies do occasionally reduce or cut their dividends and it is for that reason that I believe that portfolios should contain between 15 and 25 high quality dividend paying securities.

Tomorrow I’ll talk about my beliefs of assets allocation amongst countries.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)


Anonymous said...

Good post - funny thing is that I'm doing a whole series on AA for my portfolio this week.

It's always interesting to see what other investors choose for their allocations.

Anonymous said...

cool. I'll be sure to check it out.

Unknown said...

Nice; All my retirement portfolio is 100% equities. With a long way to go equities will outperform every other asset class. I follow book by Prof. Jeremy Siegel -

MG (moneygardener) said...

I've always thought that 'age' rule was bogus.

You could view your mortgage as your fixed income investment anyways vs. a renter.

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