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At the end of each year, I take a look at how my model long-term diversified portfolio is doing and consider the asset allocation mix.
There are two parts to this process. The first is to assess what I think the next year is going to hold for all types of securities, by sector and by asset class. It is always a guess because I can’t predict the future. So in keeping with that assessment, I resolve to alter the asset mix based on my assumptions. I never make massive changes because I don’t want to upset the balance too much.
After I rejigger the target allocations, I look at where the portfolio stands with respect to those new allocations. For example, if large-cap value stocks were at 10% of the portfolio at the start of the year, and I think they should be boosted to 12%, and the present holdings amount to 8%, I’ll buy more. If it’s less, I’ll sell and move the money to an asset class that needs to have more capital allocated to it.
Asset Allocation in 2015
Here’s how I started the year:
- Large-cap growth: 15%
- Large-cap value: 15%
- Mid-cap growth: 6%
- Mid-cap value: 6%
- Small-cap growth: 6%
- Small-cap value: 6%
- International: 14%
- Emerging markets: 7%
- Preferred stocks: 9%
- REITs: 7%
- Bonds: 1%
- ETDs: 6%
- Commodities: 0%
- Cash: 2%
So what changes might I make, and why?
A Choppy Market and a Move to Value
I’m not thrilled about the overall market’s prospects next year. I think things will be choppy. I think a lot of growth stocks are overvalued, as are blue chips. I think people are way too heavily invested in large-cap dividend stocks, thinking they are safe, when in fact they are too overvalued.
That’s why I would scale back on growth stocks in general and move to value. I think the market trades flat to down next year, and that means value stocks will fall less, and more likely to rise more. To that end, I would reduce growth stock allocation by 3% across the board, and move it all to corresponding value stock categories.
I think emerging markets are going to be a terrible place to be next year. Many of these countries are drowning in debt. Many in the Middle East are subject to rising tensions. I’ve never liked Africa because there’s far too much corruption, and China is not being friendly to U.S. businesses lately. So I’m going to move 5% of my capital elsewhere. I’ll mention where shortly.
I’m also not thrilled about the international outlook. Although some developed nations are humming along, others are really struggling. The U.K. is doing well. Australia isn’t too bad. Some, but not all, of Western Europe is doing OK. I’m going to shift out 2% of that capital elsewhere.
Preferred stocks are great places to park capital. High dividends and underlying safety mean a lot. It’s a large position to hold already at 9%, and they tend to move very little so you give up big capital upside, but the dividends are excellent. So I’m pushing this to 13%, using 4% of my 7% available capital.
I’m putting 2% into exchange-traded debt instruments (ETDs). These are also great choices for high yields. They aren’t as high as preferred stock but carry less risk in that they are higher in the capital stack. The other 1% goes to cash.
So that leaves us with:
- Large-cap growth: 12%
- Large-cap value: 18%
- Mid-cap growth: 3%
- Mid-cap value: 9%
- Small-cap growth: 3%
- Small-cap value: 9%
- International: 12%
- Emerging markets: 2%
- Preferred stocks: 13%
- REITs: 7%
- Bonds: 1%
- ETDs: 8%
- Commodities: 0%
- Cash: 3%
Worry-Free Riches
They’re owned by some of the wealthiest people on the planet. They share a few key similarities that distinguish them from 99% of equities. Even as the S&P keeps breaking record highs, they’re still crushing it. In fact, over the last ten years they’ve outpaced it by a colossal 390%.