Defining My Asset Allocation

Written by The Dividend Guy on October 18, 2007

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I have recently written about how small-caps (link #1, #2, and #3) are going to fit into my dividend portfolio and thought that it was also time to discuss my overall asset allocation strategy.

I am of the belief that portfolio performance is largely a result of proper asset allocation as opposed to simply just the stocks an investor chooses. Of course, individual stock selection is important so I spend a great deal of time ensuring the stocks I select are quality companies. However, blindly picking stocks here and there can be detrimental without some form of portfolio structure set up to ensure you have the right assets in the right proportion. It comes down to proper diversification. Essentially, I use this image as a guide (click to enlarge):

Asset Allocation Portfolio Funnel

To display my asset allocation target, and what my actual asset allocation actually is, I have created a chart with two axis. The first axis (left), is my actual asset allocation in my portfolio. The second axis (right), is what my target is. I like this format because it quickly shows me the areas I need to improve upon. Please note that this is the asset allocation for all of my investment accounts as I view my portfolio as a whole and not a series of smaller portfolios.

The Dividend Guy Asset Allocation

In my eyes, I have 3 areas for improvement. The first is to get the small-cap exposure in my portfolio. My target is 5% and my actual is only 1%. This will be taken care of shortly. The second area for improvement is in global equities. I am shooting for 30% exposure to global equities but currently only have 20%. I have been slowly working on this as I contribute 50% of my pension contributions to a global pension fund. The third area for improvement is to reduce my exposure to Canadian equities as I currently have 37% in Canadian equities. I want to get this down to 30%. I am not going to sell anything but will not be buying any Canadian equities until this gets more inline with my target.

Taking my allocation a step further, I have also examined my sector allocation to see which industries my equities are allocated to. The worry here is that I do not want excessive over-exposure to one industry over another. Some emphasis on different sectors can be beneficial, but nothing too excessive. Here is a graph that displays this breakdown:

The Dividend Guy Sector Allocation

Pretty obvious where a good percentage of my assets are tied up in - banking. As many dividend investors know, the banking industry is ripe with dividend growing companies that have performed very well in the past and can be very attractive for people seeking yield. In my particular case, Royal Bank, Bank of America and Citigroup are in my portfolio. However, I feel I am too exposed to the banking sector and want to reduce this over a period of time. I am not going to sell anything, just not buy anything banking related over the next while.

I hope that provides you with some context on my asset allocation strategy. As usual, please let me know if you have any questions or comments on my asset allocation strategy. I would love to hear from you.


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12 Comments so far

  1. Tyler October 19, 2007 7:48 am

    With the recent drop in BAC, I’m tempted to buy some even though it looks bleak in the short term. You just can’t ignore a 5% current yield and a rising dividend.
    I think that in 10-15 years if I didn’t buy at least one board lot right now that I’d really regret it.
    What do you think?

  2. The Div Guy October 19, 2007 7:58 am

    Div Money,

    I remember buying Bank of New York stock in the early 90’s when some banks were failing. Over the next couple of years my BONY stock did very well. We may not be at the bottom but I think starting a position makes sense for the long run. I have started buying BAC in August and will continue to add.

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  5. Aaron October 21, 2007 8:33 pm

    It does sound like you are a little heavy in the banking area, though one would think that this sector is actually getting a little undervalued at this point on a long term basis.

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