Obviously, the past few weeks have been a reality check for investors who thought they had the proper asset allocation for their portfolio but were wrong. I consider myself part of that group. Multiple years of gains can make one complacent and oblivious to the downside, especially when it hits hard. I have a fairly large portfolio (just about 7 figures) and my asset allocation is about 40% equities, 50% bonds and 10% cash. However, I realize that my equity portion is too aggressive and my bond weighting is geared more toward high yield bonds. So, my equity portion feels more like 60% equities, which is way too high for me given that my goal first and foremost is a low risk, income oriented portfolio. With a million dollars in my portfolio, I would be happy with 3-5% returns on average over the next 15 years, when I hope to retire.
My question is - what is the best way to change your asset allocation, slowly over a period of a year or two or drastic changes over a period of a few months? I know it's not the best time to make those changes, but maybe I should wait for the market to settle down.
Comments
"what is the best way to change your asset allocation, slowly over a period of a year or two or drastic changes over a period of a few months? I know it's not the best time to make those changes, but maybe I should wait for the market to settle down."
If you've any funds that generated profits from the past few years, find yourself an excellent bond fund that can serve as your CORE--- even if it's not labelled as such. I own DLFNX, but the big, fat sister--- DLTNX--- performs better, even through the recent fecal couple of weeks. Put profit into a core-bond fund, out of high yield. But don't necessarily CLOSE your HY positions.
Or, look at the whole thing as a longer-term process of DCA-ing into more ideal funds for your own Big Picture. Right now seems a decent time to buy. Or get into some good, currently cheap blue-chip individual stocks. Apple at these prices looks like a steal.
http://www.morningstar.com/stocks/xnas/aapl/quote.html
http://www.morningstar.com/funds/XNAS/DLTNX/quote.html
http://www.morningstar.com/funds/XNAS/DLFNX/quote.html
http://www.morningstar.com/funds/xnas/dodix/quote.html
http://www.morningstar.com/funds/XNAS/FTBFX/quote.html
I think how you go about this is up to you with there being no wrong or right answers.
I usually make changes slowly. First I think you need to Xray your portfolio as a whole to see what you have and to see its diverfisication. Then you need to Xray each fund to determine its makeup. Then you can start subtracting or reducing positions adjusting your overall allocations here and there and then view this through Xray to view these changes. You might also study some funds that have an asset alocation and risk profile you are seeking to build.
Again, I'd go about these changes slowly no more than 1% per month in moving assets from one area to another. Example, if you are wanting to reduce you allocation to high yield start working this off slowly because now that they have been beaten-up of late they might recover some throuh an average out process. Then you need to decide where you want to put the one percent you are lightening up over in the high yield area. Do you have any convertible and bank loan funds? These are something you might wish to explore. I have them in my portfolio.
Good luck ... and, again my suggestion is to make changes slowly. Following the one percent per month rule over a years time you will have relocated 12% of the portfolio in a years time. Based upon a million dollar portfolio that's about $120,000.00 relocated each year. You might find that it will pay to keep moving some money around from time-to-time moving away from a static allocation towards something that offers some flexability.
In addition, I'd find a risk tolerance questionaire and determine what overall cash, bond and stock allocation is right for you. My broker sends me one to fill out and return about once annually, now that I am retired. I take a little more risk than they suggest in equities but I also hold more cash than they think I should plus I am a little light in fixed income over their suggested range. This might be something worth visiting.
Some may or will argue that the "tax status" of current investments will/can also affect what one sells to change the balance of a portfolio. With the exception of "Roth" type investments, most of us will eventually pay taxes of some form and amount from our investment sales or required minimum distributions from a variety of money sources.
Even those with annuities will eventually be required to have RMD at age 95, if they obtain that goal.
You didn't note as to the tax status of your investments that may be considered for a sale to re-balance your portfolio.
Is the tax gain or loss also a consideration for the portfolio mix sells?
I am not able to offer any advice in this area, as the vast majority of our portfolio is tax sheltered; and therefore, sales are not taxable considerations.
Regards,
Catch
About 75% of my portfolio is in taxable accounts because I inherited a rather good sum of money. I do max out my Roth IRA and contribute to a 401K as well. But they will have a less substantial effect on my overall portfolio than my taxable accounts.
Pie charts are a lot of fun. Used to play around slicing and dicing in the early years. Good way to visualize your allocation and determine what makes sense to you.
Past 10 years (excluding '08-'09) my only significant changes have been to gravitate slowly to a more hands-off approach. 15 years ago that was maybe 50% When the '08 debacle began it was around 60% (but I violated those guidelines in early '09 by loading up on global stock funds out of desperation.) Today I'm 80% hands off. The primary value (assuming there is any) is that it prevents me from tinkering around much and, hence, protects me from my own stupidity.
Not recommending any of this. Not an expert. Last couple years I've looked more like an idiot.
$29 oil? Who would've thunk?