Creating An All-Weather Portfolio
Harkening back to our meeting of this past Thursday, I thought that it would be prudent to re-state some important points that we tried to make.
How your assets are allocated will have a huge impact on portfolio performance over time!
The two biggest determinants of asset allocation are risk tolerance and investment time horizon.
The more risk averse you are as an investor, the greater the portion of bonds/cash versus stocks you should have in your portfolio.
Likewise, the shorter your time horizon, the larger the percentage of your portfolio that should be devoted to bonds/cash.
Here's a good rule of thumb for setting an asset allocation: Subtract your present age from 110, and this will give you the percentage of your portfolio that should be in stocks. Then split the remainder between bonds and cash.
Don't forget that whenever you are allocating assets, be sure to take into account ALL of your assets!...This may include 401K and/or IRA plans; various stock accounts; annuities; mutual funds; as well as cash.
You should always consider ALL of your various portfolios as ONE big portfolio, for asset allocation purposes.
Building an All-Weather Portfolio:
For those investors who abhor market volatility and want to protect their assets as much as grow them, an "all-weather" portfolio should fill the bill.
Note: Keep in mind that any portfolio that attempts to minimize risk will also give up a bit in terms of long-term growth. But what we are trying to achieve with this type of portfolio is to reach an acceptable combination of reasonable return without huge swings in portfolio value!
The following "all-weather" allocation should achieve that goal:
Stocks: 67%
Bonds: 25%
Cash: 8%
Stock selection:
You'll want to accomplish two things when allocating within stocks:
1. You want to make sure that you are not overexposed in any one industry sector.
2. You want to make sure that you are not overexposed in any one stock.
The S&P 500 Index is a good benchmark to use for industry sector portfolio weightings, and one useful tool for doing this is Risk Grades, located in our "Links" section.
As for stocks, the amount of exposure to individual stocks should be based on several factors: 1) The amount of money available to invest; 2) your time horizon; and 3) the type of stocks that interest you... And it would be well to limit your weightings to no more than 4% in any one stock!
How many stocks to have in your portfolio?
Research has shown that stocks have become more risky over the last several years. This in turn implies that diversification across a number of stocks is more necessary now than ever before... And you should be aware that by owning 10 or 15 stocks, you are taking on greater risk today than you may have been assuming just a decade ago. If that increased risk puts you outside of your comfort zone, then you probably need to diversify by choosing an alternative to individual stocks such as an equity index mutual fund as the way to achieve diversification for your portfolio.
Finally, if you gain nothing else from reading this information, let it be the point for you to begin spending time in thinking about portfolio creation, and realizing just how valuable it can be to spend your time in doing exactly that.
Everyone usually focuses on individual investment selection, but it's how you combine individual investments together into a cohesive portfolio that will ultimately determine the success or failure of your own personal investment program!
* * * * *
How your assets are allocated will have a huge impact on portfolio performance over time!
The two biggest determinants of asset allocation are risk tolerance and investment time horizon.
The more risk averse you are as an investor, the greater the portion of bonds/cash versus stocks you should have in your portfolio.
Likewise, the shorter your time horizon, the larger the percentage of your portfolio that should be devoted to bonds/cash.
Here's a good rule of thumb for setting an asset allocation: Subtract your present age from 110, and this will give you the percentage of your portfolio that should be in stocks. Then split the remainder between bonds and cash.
Don't forget that whenever you are allocating assets, be sure to take into account ALL of your assets!...This may include 401K and/or IRA plans; various stock accounts; annuities; mutual funds; as well as cash.
You should always consider ALL of your various portfolios as ONE big portfolio, for asset allocation purposes.
Building an All-Weather Portfolio:
For those investors who abhor market volatility and want to protect their assets as much as grow them, an "all-weather" portfolio should fill the bill.
Note: Keep in mind that any portfolio that attempts to minimize risk will also give up a bit in terms of long-term growth. But what we are trying to achieve with this type of portfolio is to reach an acceptable combination of reasonable return without huge swings in portfolio value!
The following "all-weather" allocation should achieve that goal:
Stocks: 67%
Bonds: 25%
Cash: 8%
Stock selection:
You'll want to accomplish two things when allocating within stocks:
1. You want to make sure that you are not overexposed in any one industry sector.
2. You want to make sure that you are not overexposed in any one stock.
The S&P 500 Index is a good benchmark to use for industry sector portfolio weightings, and one useful tool for doing this is Risk Grades, located in our "Links" section.
As for stocks, the amount of exposure to individual stocks should be based on several factors: 1) The amount of money available to invest; 2) your time horizon; and 3) the type of stocks that interest you... And it would be well to limit your weightings to no more than 4% in any one stock!
How many stocks to have in your portfolio?
Research has shown that stocks have become more risky over the last several years. This in turn implies that diversification across a number of stocks is more necessary now than ever before... And you should be aware that by owning 10 or 15 stocks, you are taking on greater risk today than you may have been assuming just a decade ago. If that increased risk puts you outside of your comfort zone, then you probably need to diversify by choosing an alternative to individual stocks such as an equity index mutual fund as the way to achieve diversification for your portfolio.
Finally, if you gain nothing else from reading this information, let it be the point for you to begin spending time in thinking about portfolio creation, and realizing just how valuable it can be to spend your time in doing exactly that.
Everyone usually focuses on individual investment selection, but it's how you combine individual investments together into a cohesive portfolio that will ultimately determine the success or failure of your own personal investment program!
* * * * *
posted by Bob Moser at
1:29 PM
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