Tuesday, March 6, 2012

Asset Allocation

Looking at my blog you probably wouldn't think I hold any fixed income.  Surprise!  10% of  my investments are infact fixed.  I hold them in my thrift savings plan (federal employee 401k) account which I don't really talk about.  I have an aggressive allocation of 90% stocks, 10% fixed income.  Here's why:

#1:  I believe in dividend growth investing.  The concept simply makes sense and is easy to execute.  Buy and monitor stock in companies who pay a decent yield and will increase dividends faster than the inflation rate.  Over time the 2.75%, 3%, 4% yields will grow to a substantial YOC.  My timeline for retirement is 16 years.  3% caterpillars have a long time to morph into butterflies.

#2:  Interest rates are historically low.  Low interest rates mean bond yields are also low.  I actually like bonds because of the safety they provide, but right now it is hard to justifiy ownership.  Why own an asset that is guaranteed to be eaten away by inflation when you can get something else with a similar yield that can outpace?  I'm not bold enough to go 100% stocks, which is why I maintain the 90/10 ratio.  If rates were higher I'd have no problem being 75/25 (possibly higher depending).  Yes, certain flavors of fixed income such as TIPS can meet inflation.  But can they beat it?

#3:  I am young.  Conventional wisdom says more stocks, less bonds while you are young.  I do follow this advise.  Not so much for additional risk/reward, but because investments that makes the most sense to me are dividend growth stocks. 

Why not further diversify with precious metals, specifically gold?  There is no doubt gold has performed extremely well the past few years.  Everyone loves gold right now, I even supervise a young soldier who invests $100/mo in a gold fund.  Gold is a good store of value, but would pay me absolutely nothing.  You'd have to sell it to pay bills; the exact opposite of my goal.  As a side note, I always encourage my Joes to save and invest even if it's something I personally wouldn't buy such as a gold fund.

Eventually I will be over allocated to stocks unless I buy fixed income in my brokerage accounts.  It's only a matter of time.  Once in a while I'll need to make purchases to maintain the balance I want.  I'll probably continue to avoid bonds due to low yields, but have thought about preferred stock and possibly junk bond etfs.  Look for me to purchase fixed income soon, maybe this month.


  1. I am over allocated in stocks and I know this. I have a small bond holding in my 401k, but it is a very low percentage. In addition to it I have a junk bond fund that I've actually been quite happy with. It's also in my 401k.

    Being heavy in stocks is going to hurt when the next market crash occurs. I try to offset this by imagining how I would feel if I logged in my brokerage account and the market value was cut in half. This would be the time to add to my positions, but knowing what to do and acutally doing it are two different things. I probably need to add a bit more bond exposure to my portfolio, but as you said, with yields being so low it's hard to justify.

    1. Keep in mind that eventually interest rates are going to rise which will hammer bonds. The only question is when. We know the government plans to keep rates low the next couple years. I have a suspicion they will try to keep rates low for a prolonged period of time in order to afford payments on our rediculous national debt.

      We had downturns last summer where my portfolio was red. Surprisingly it didn't really bother me. I viewed it as a chance to buy great stocks at low prices. I try to ignore portfolio worth. Auguest 2011 was a crazy, crazy time in the stock market. I didn't sell anything, only made purchases. In '08/'09 I held my mutual funds and continued to dollar cost average. I admit that I couldn't even look at my statements during that period.

  2. I read an article that suggested you treat Social Security as a fixed income asset. Seems to make some sense - you get a guaranteed return. The author went on to suggest that most people don't factor this in to their nest egg and could afford to be more aggressive or are already balanced enough. Thoughts?

    1. Hi there,

      Thanks for asking this question. It's a tough one and I don't think there is a right answer. Some people don't think SS will be solvent in the future, while others are more optimistic. It's a touchy subject. If you feel SS will be around, it might make sense to think of it as fixed income or maybe as bonus income. But you can't put SS in your portfolio. Stocks, bonds, precious metals, etc. behave differently. Many strategies attempt to capitalize on these behaviors. In such cases you would still want bonds. For example: the permanent portfolio is 25% stocks, bonds, gold, and cash. You can't substitute Social Security for bonds. Bonds are there for a specific reason.

      Other strategies (like mine) are different. It might make sense to view SS as fixed income and invest more aggressively. Personally I ignore SS because I expect to retire early. It will be a nice bonus later on.

      Hope that makes sense, it was hard to articulate my thoughts.