The Dividend Guy Investment Process Part 3: My Asset Allocation
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Updated September 9, 2009 Selecting an asset allocation means you are putting your risk profile to work in a way that balances the risk and reward in your overall portfolio. It is also the factor that contributes the most to a portfolio’s return. Read that again. It is also the factor that contributes the most to a portfolio’s return. To illustrate this, think of investing like a funnel:
Click to EnlargeThis funnel is derived from research presented by Ken Fisher in his book, The Only Three Questions That Count
The right asset allocation balances the volatility (i.e. standard deviation or risk) in a portfolio with the expectation of certain returns. My approach is to take on as little risk as possible but enough that will allow me to beat the market returns over time. There is a great deal of research that has been done to identify what these optimal asset allocations are. I use William Bernstein’s
Coming up with an asset allocation does not need to be overly complex. An individual can choose to hold as few as 4 asset classes or as many as they want. They key is finding something that you can manage and keep track of. Based on the research from Bernstein and Sound Investing, and my desire to take a very active part in my portfolio, I have determined that my target asset allocation is going to look like this:
Click to EnlargeThe most important thing I do to manage my portfolio is to ensuring that my actual asset allocation tracks my target asset allocation. At least once a year, I will rebalance my portfolio. Since I tend not to sell index funds, I use additional funds deposited into my accounts to purchase my way to the target allocation.
Next, I am going to cover the more sexy part of investing – the building of a portfolio. In Part 4A I will talk about building a core portfolio. Part 4B will discuss how I add oomph by buying dividend growth stocks.
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Nick said:
What do the abbreviations in your Asset Allocation table mean?
CND Indv?
ST Bond?
IT Bond?The first four assets don’t have a location like the other ones, either US or Int’l. Where are the first four invested?
Thanks.
April 15th, 2009 at 12:12 pm -
The Dividend Guy said:
HI Nick:
CDN Individual are Canadian individual stocks
ST Bonds are short term bonds
IT Bond are real return bondsApril 16th, 2009 at 8:51 am -
Mark said:
Minor typo: They key is finding …
February 13th, 2010 at 2:05 am -
George said:
Hi,
I looked at your asset allocation. Its mostly Index funds. It means you are depending on others to make your investment decisions for you. You sound like a smart Guy. Why not make your own stock picks?
I think you will get more lift if you move out of some of those ETFs (maybe 30%), and into stocks.
Note, I also use a lot of ETF’s, especially Vanguard (fantastic returns last year), but not for my entire portfolio.
Just my 2 cents.
January 19th, 2011 at 7:43 am
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