I have had a problem in my portfolio for awhile now, and have not done much about it in light of the market we have been experiencing. The problem is that I am WAY light on my actual fixed income allocation, yet I have not purchased any fixed income assets in a while.
The reason I have not is because I have been using any money I add to my portfolio to purchase equities – either U.S. based or global and of the value and small-cap variety. My thinking is simple – we have seen a huge correction in the market and I really wanted to take advantage of these lower prices. I am long-term investor with at least 25 years until retirement and I want to maximize my returns. The way to do this in the past has been to take on more risk by holding a higher percentage of your portfolio in equities. However, I have an asset allocation to help maximize the risk / reward ratio in my portfolio and that asset allocation says I should have 35% of my portfolio in fixed income. Yet, as of this writing I am at only 5%. That is not a slight discrepancy – that is a huge miss.
As I think about what I have been doing by adding to my equity portfolio and ignoring my fixed income allocation it reeks of market timing. I have watched the market tank and have decided that now is a good time to buy equities and I did it. On the flip side, I have also decided that fixed income is not a good investment right now and made the decision not to purchase them. I suspect that eventually interest rates are going to rise and bond returns will drop.
The easy thing to do would be to set up an automatic investment plan into all of my holdings on a monthly basis. However, that does not work for me as I hold both index ETFs and individual dividend stock holdings which are not conducive to this type of dollar cost averaging. Every month I do deposit a set amount from my paycheck into my brokerage account which I then allocate. The plan was to invest in assets that were not aligned with my target and as I have discussed, I have chosen to focus on equities as opposed to the fixed income arena because of my anticipation that fixed income will not return much over the next few years.
Then another thing occurred to me again – I am thinking like a short term investor and not a long term investor who is letting the portfolio work for him. The fixed income component of my portfolio is not designed to provide returns, but to balance risk and reduce the volatility in my portfolio so that I am not inclined to make stupid emotional decisions.
This fact has lead me to a decision – to once again start buying fixed income securities to get my fixed income allocation closer to where it should be. I may not do this every month but by the end of the year I have it as a goal to have at least 20% of my portfolio in fixed income. I will keep you in the loop as usual!