The Dividend Guy Investment Process Part 3: My Asset Allocation

Written by The Dividend Guy on January 14, 2008

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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:

Asset Allocation Portfolio FunnelClick to Enlarge

This funnel is derived from research presented by Ken Fisher in his book, The Only Three Questions That Count. 70% of investment returns come from an investor’s asset allocation and only 10% comes from security selection.

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 work as my guide to determine my asset allocation. However, I differ substantially from his methods as I invest in individual stocks and he recommends using index funds solely.

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 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:

The Dividend Guy’s Revised Asset AllocationClick to Enlarge

The 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 companies, 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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1 Comment so far

  1. February 4 - Watch Out For These 6 Slick Mutual Fund Marketing Tricks » The Dividend Guy Blog February 3, 2008 8:43 am

    […] at managing our money than we could ever be. Their experience will help us lower risk. Remember, 70% of portfolio returns stem from asset allocation, not investment […]

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