The Implications of A Down Market on My Asset Allocation
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In late 2008, I did some reshuffling of my portfolio to take advantage of the down markets. My area of focus was primarily in the international asset classes as these had seen huge declines in values and I really wanted to take advantage of this. As a long-term investor, I strongly believe that it is wise to reallocate money to asset classes that are down significantly.
It is important to note that I am not talking about averaging down into specific investments. In my experience that has not been a very good strategy (see falling knife). What I am refering to in this post is putting additional funds into an entire asset class that has seen its values drop. Over the long term, I hope this strategy will pay off through increased returns.
I put additional money into three different index funds that I use to invest into international assets. These three include the MSCI International Index (ca:XIN), the Vanguard Emerging Markets Index Fund (VWO), and my pension fund – the BGI EAFE Equity Index. The bulk went into the BGI pension fund because I decided to remove money from the fixed income component of my portfolio and reallocate it to this fund. The implication is that I am now significantly low in the fixed income component of my asset allocation (see below).
Click to EnlargeI think that this was a prudent risk to take, but it means that I need to focus on adding to my fixed income component as a next step. The most important component of a portfolio is the asset allocation one chooses, so it is very important that I quickly bring my fixed income allocation up to where it should be. This means that I will not be doing as much buying of dividend stocks over the next little bit. Not an issue as this is all part of my investing code.
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Manshu said:
This is really interesting. Only a few days ago – I had written that I do not see a lot of people thinking about Diversification with respect to asset prices and I see this great piece by you. Very interesting and I agree that the risk is well worth it.
January 12th, 2009 at 1:54 pm -
Thomas said:
I undertake a similar stock strategy as you, concentrating on obtaining quality companies paying dividends with growth potential (think I’m a bit riskier than the strategy I’ve read here…but I’m young as well).
Knowing the limits and risks of this dividend strategy, I use my 401k plan to round out my investment. I also moved money from my 401k plan (out of gov’t securities, treasury yields, and money market funds), into international stocks and have adjusted my contribution percentage this way as well. But also am moving towards, small cap etfs and growth companies (have a substantial fixed asset allocation).
Think it is important to diversity and due to my prediliction for dividends and safety, I use my 401k to round out my portfolio.
January 12th, 2009 at 11:44 pm
