Hello,
From time-to-time I have been asked how I determine and adjust my asset allocation.
With this, I have linked several of my reference sources.
One is the fact sheet for Columbia’s Thermostat mutual fund, CTFAX. On page two, under Asset Allocation, one can reference a chart that shows based upon the S&P 500 price valuation how much of the fund is invested in stock funds vs. bond funds. Currently, they indicate with the S&P 500 Index at a valuation of above 1400 but below 1450 the fund would have 45% to stock mutual funds and 55% to fixed income funds, which I assume would include cash too.
https://performance.columbiamanagement.com/content/columbia/pdf/LIT_DOC_3C97987F.PDFAnother one is Moringstar’s Market Valuation Graph which I have linked below for your easy reference. It is showing stocks in general are at about a 2% discount with Friday’s close. My normal portfolio’s asset allocation has been about 15% cash 30% income and 55% equity, set based upon my past experience and my tolerance for risk. It is now light income by 5% and heavy in cash by 5% with equities at 55% as of this past Friday as I continue to sell equities into the stock market rally.
http://www.morningstar.com/market-valuation/market-fair-value-graph.aspxWhy? For fixed income as interest rates that are expected to rise the valuation of most bond funds will fall so I lightened up my fixed income area over a year ago by about 5%; and, I went heavier into stocks by 5%. For equities, let’s say for discussion, my neutral allocation to stocks is 50% and I adjust either up or down based upon stocks being over or under valued as rated by Moringstar. Since, Moringstar is saying socks, in general, are at about a current 2% discount, as of Friday, I would then add the discount to the 50% neutral asset position for equities. This would call for an equity allocation of 52%. However, in practice, I use a 10 day average of the discount. This currently computes to a little better than a 4% discount. Under this format this would call for an equity allocation of 54% … and, that is about where I am at 55%. I try to stay within a 95% to 105% range of what is called for. Currently, this range computes to a low percentage of about 51% to a high range percentage of 57%. Since, my allocation falls within this range … I am good to go. In addition, I make allowances for seasonal trends.
Note: The Columbia Thermostat Method calls for equities to be at about 45% and by my valuation method, described above, calls for equities to be at about 54%. I look at both but follow my method mostly. In addition, my maxium allocation limit to equities is about 65% and my low allocation limit to equities is about 40%. That is about 15% up and 10% down form neutral. This is still in line with my tollerance for risk.
I use Ron Rowland’s Leadership Strategy which I have linked below as an aid that I use to assist me in determining which equity asset classes to overweight within the equity side of my portfolio.
http://investwithanedge.com/leadership-strategyI hope you have found this post to be insightful as to how I make adjustments and govern my asset allocation.
Have a Great St. Patrick’s Day … and, I wish you “Good Investing.”
Skeeter
Comments
Since I don't get the premise, I cannot get your conclusions :O
My interpretation of what they mean based upon my review of the fact sheet is with different valuation ranges for the S&P 500 Index they adjust the stock vs. bond allocation to the fund according to the asset table. The table can be adjusted form time-to-time based upon varying market conditions.
As provided in the current table … With the valuation that you reference, the S&P 500 Index being above 1750, they would allocate 10% to stock funds and 90% to fixed income funds. As they state in a foot note … “The portfolio funds and weightings are subject to change.” So with this as market valuation matrix changes they can change the allocations.
Hope this better helps explain things.
Good Investing,
Skeeter