Taking the Least Amount of Risk – the Right Asset Allocation
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Frank Armstrong calls it “The Glide Slope” and it refers to adjusting your asset allocation from riskier assets to less risky ones as you get closer to retirement. In this process we as dividend stock investors are all after The Super Efficient Portfolio[ad#tdg-embedded]
The book, The Retirement Challenge
Essentially, what we as investors are trying to do is find the right balance between risk and reward. We want to earn as much money as possible with as little risk as feasible. The way we typically do that is by adjusting the percentage of equities to fixed income in our portfolios because equities are that risky component that provides the return while the fixed income brings us less volatility and more safety. It is a constant battle to determine what that magic split is between equities and fixed income and if you find it then your have found the Super Efficient Portfolio.
Seriously, that Super Efficient Portfolio is elusive but Armstrong has set out a couple of tables in his book that can help.
The Glide Slope
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With the Glide Slope, as you get closer to retirement you systematically reduce your equity exposure. It is interesting that even in retirement Armstrong has investors with a minimum of 60% equity exposure. Is this too much? I am not sure but the thinking is that we need to keep that portfolio growing even when we are retired. If we have dividend stocks providing us with a lot of our retirement income then it is likely that 60% would be a pretty easy number to achieve. Armstrong suggests that investors refer to the chart every five years and make the adjustments to your portfolio. Personally I will be doing it more frequently but that is a style issue.
The Glide Slope Examples of Suggested Asset Allocations
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In addition to the Glide Slope, Armstrong also provides a table of a suggested asset allocation split between domestic equities, international equities, alternative investments (REITs), and fixed income. Click on the table to the right to see the chart in more detail.
As investors (and dividend investors) asset allocation is the most important thing that we can focus on in our portfolios. At the end of the day, we need to, “Match the mix between equity and fixed income to our unique financial situation, objectives, time horizon, and risk tolerance.”
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8 Comments on this post
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Rob Bennett said:
It would seem to me that a more fruitful way to limit risk would be to lower your stock allocation as valuations increase rather than as you age. Stocks are not too dangerous for those near retirement if valuations are reasonable. Stocks are dangerous for young investors if valuations are out of hand.
Rob
August 28th, 2009 at 9:05 am
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