I have had a problem in my portfolio for awhile now, and have not done much about it in light of the market we have been experiencing. The problem is that I am WAY light on my actual fixed income allocation, yet I have not purchased any fixed income assets in a while.

The reason I have not is because I have been using any money I add to my portfolio to purchase equities – either U.S. based or global and of the value and small-cap variety. My thinking is simple – we have seen a huge correction in the market and I really wanted to take advantage of these lower prices. I am long-term investor with at least 25 years until retirement and I want to maximize my returns. The way to do this in the past has been to take on more risk by holding a higher percentage of your portfolio in equities. However, I have an asset allocation to help maximize the risk / reward ratio in my portfolio and that asset allocation says I should have 35% of my portfolio in fixed income. Yet, as of this writing I am at only 5%. That is not a slight discrepancy – that is a huge miss.

As I think about what I have been doing by adding to my equity portfolio and ignoring my fixed income allocation it reeks of market timing. I have watched the market tank and have decided that now is a good time to buy equities and I did it. On the flip side, I have also decided that fixed income is not a good investment right now and made the decision not to purchase them. I suspect that eventually interest rates are going to rise and bond returns will drop.

The easy thing to do would be to set up an automatic investment plan into all of my holdings on a monthly basis. However, that does not work for me as I hold both index ETFs and individual dividend stock holdings which are not conducive to this type of dollar cost averaging. Every month I do deposit a set amount from my paycheck into my brokerage account which I then allocate. The plan was to invest in assets that were not aligned with my target and as I have discussed, I have chosen to focus on equities as opposed to the fixed income arena because of my anticipation that fixed income will not return much over the next few years.

Then another thing occurred to me again – I am thinking like a short term investor and not a long term investor who is letting the portfolio work for him. The fixed income component of my portfolio is not designed to provide returns, but to balance risk and reduce the volatility in my portfolio so that I am not inclined to make stupid emotional decisions.

This fact has lead me to a decision – to once again start buying fixed income securities to get my fixed income allocation closer to where it should be. I may not do this every month but by the end of the year I have it as a goal to have at least 20% of my portfolio in fixed income. I will keep you in the loop as usual!

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April 20, 2009, 7:49 am

your post struck a responsive chord because I’m there too– very little in fixed income, because of both low yields on bonds and very inexpensive (i hope) equity valuations.

My core belief is that a portfolio of very high quality dividend paying stocks can double in the next 5 years off the present low level. I also believe that the massive government stimulus will produce higher interest rates. So five years from now I hope to be able to take that double and invest in in bonds at higher yields.

The market timing aspect of this strategy bothers me too, but remember how your portfolio performed over the past 15 years. Rebalancing wouldn’t have helped much in the equity market. I’m not trying to time every tick, but the risk/reward in the stock market following a 50% drop seems pretty attractive.

And bond yields are at historic highs. Buffett called it a bond bubble. Even though spreads are wide, absolute yield levels aren’t particularly attractive compared with where they’ve been over the past 40 years.

April 20, 2009, 2:45 pm


The problem is what type of fixed income security to buy. Longer Term CD’s could get you 4% if you lock your money for 5-7 years. US Government bonds won’t even get you 4%.. You could purchase corporate bonds or even high yield preferred stocks, but this could backfire..


April 26, 2009, 6:32 am

I support the idea on corporate bonds given they did too have been hammered and the spreads are really attractive. I mean if you are willing to purchased undervalued equities, the bonds behind the same companies can also be had for perhaps lesser potential return but even more security than the common.

I mean if you are willing to purchase say Royal Bank common, what’s not to say you can’t buy Royal bank preferred’s or bonds. In fact you could even go for bonds of companies you were barely considering their equity. Real return bonds are another option, they are technically cheap right now and if some are of the belief inflation is gonna be a huge issue (I personally don’t, not at least for next couple years).

April 27, 2009, 9:39 pm

Dumb question… Why does someone with a 25-year investment horizon want ANY fixed income assets? Why not go 100% stocks? (After keeping some cash equivalents for your short-term needs, of course.)

June 17, 2009, 5:01 am

[...] it took me from only 10% fixed income to a whopping 12.4% fixed income. As I wrote about a month ago, I had been focused on buying equities with the market down from October to January and the fixed [...]

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