Geographic Allocation

Yesterday I talked about allocation amongst the asset classes and today I’m going to talk about the second allocation of concern, allocation amongst countries. Before I being I just wanted to reiterate that there are many different views and beliefs on this subject. What I’m going to attempt to do is simply state what I believe is the best country allocation for my unique situation. Yours may be the same but will probably be different based on your unique investment objectives, time frame and risk tolerance.

Contrary to popular opinion I believe that the majority of my retirement portfolio should be in CDN dollars. I am aware of the argument that Canada is only 2.5% of the worlds markets so we should be diversifying as much as possible to take advantage of opportunities globally. Although I agree with that in principle I believe that the majority of my holdings should be in the currency of the country that I will ultimately be retiring in. Once my dividend cash flow is established I do not want my retirement interrupted because the peso, US dollar etc... is having a bad couple of years. I currently have about 70% of my holdings in Canadian securities but would be willing to go as low as 55% (if I thought a great opportunity presented itself) otherwise I would be comfortable between 60% and 70% CDN.

(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)

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)

Diversification II

Ok so after my rant about diversification I’m sure some of you scrolled down to see what my holdings are (and to judge if I’m diversified or not). I got a few emails from people who noticed that I have very little fixed income and no technology companies. Well you asked for it so here it is...my thoughts....I don’t hold any technology companies for the simple reason that I think most of them are over-valued and don’t have a sustainable competitive advantage. A lot of tech companies seem to be trading on the next-big-thing, take the Motorola Razor for example, it was all the rage and now apparently it’s a piece of crap, it’s the reverse for Apple, they went from piece of crap to cool and I’m sure that if something better and “cooler” came out their ipod or iphone would go from cool to crap again---don’t think so? find someone with a teenager and ask them. I on the other hand think banks are cool, insurance is trendy, and nothing is “awesomer” on a nice winter day than oil and pipelines, not to mention a building that houses seniors (CSH.UN)….Radical Dude!

As for fixed income…well that ones easy…
1. The rates sucks
2. I’m young (I can ride the stock market ups and down)
3. Longer term I think high quality dividend paying blue chips will beat the yield of any 10 year bonds (not including junk bonds).

Diversification

Everyone talks about diversification and ya it’s true you have to be diversified if you want to spread out your risks, limit your downside, protect your nest egg blah blah blah…. But what about being too diversified? Personally I don’t like the idea of being diversified just because you’re supposed to be. In my opinion if you’re going to blindly diversify your holdings across multiple sectors, currencies, countries etc… why bother buying stocks? Just buy a few index funds and get it over with. Why waste the time and commission fees buying individual stocks? If you diversify too much you’re going to basically mimic the index anyways. I’m not telling you that diversification is bad I’m just saying that personally I think you should buy what’s cheap and if that results in you becoming diversified over time so be it, but don’t buy a fully valued company just for the sake of diversification… in my opinion that’s just stupid (you can’t beat the market by mimicking it).