The market continues to grind higher. I will be able to put some money to work soon but where is the value? My dividend growth portfolio is missing Colgate-Palmolive and Chevron. CL is overvalued right now so I will wait for a better entry point. Chevron, Wells Fargo and Lockheed-Martin are definitely on the American stock dividend growth radar for me right now.
If they continue to rise I may use their overvaluation as an opportunity to diversify my portfolio with foreign stocks, probably through ETF's which have nice yields. If I can find monthly distributions so much the better.
Also in the cards are an entry into foreign real estate and diversification into small cap value stocks, both domestic and international. Over long time horizons, commodity stocks and ETF's have proven to really lower the volatility of one's portfolio while increasing returns so my eyes are open there as well.
I have a long time horizon so I will be underweight fixed income, interest bearing bonds. I already hold a slightly leveraged muni ETF in my taxable account which earns over 5% tax free and may add a slightly leveraged corporate bond ETF to my or my wife's IRA to lower the volatility. This diversification will not raise returns over the long term, however. Studies have shown that for the small investor that honor belongs to equities, real estate and commodities.
The studies on asset allocation that I've read have been eye opening. Diversification through holding multiple asset classes is a free lunch. It has been demonstrated that there is lower volatility with higher returns so long as one's time horizon is at least 10 years. I wants me some of that :)
Suggested reading includes:
Asset Allocation: Balancing Financial Risk by Roger Gibson
The Ivy Portfolio: How to Invest Like the Top Endowments by Faber and Richardson
The Intelligent Asset Allocator by William Bernstein
Pioneering Portfolio Managment by David Swensen (the Yale endowment manager)
Tuesday, May 7, 2013
Friday, May 3, 2013
Asset Allocation
As I continue my never ending investment education I have graduated to the issue of asset allocation. Most of the books I have read are text books written by PhD.'s and the like from well known business schools. One was written by a manager that runs the famous Yale endowment.
The bottom line is that by spreading one's investments among multiple asset classes one can achieve greater returns with less risk. Relevant asset classes are domestic, international and emerging market stock (although I just read about a new category called "frontier" markets which include Africa and the like"), domestic and international government bonds, domestic and international corporate bonds, real estate (including REIT's), commodities, BDC's and the list goes on and on.
The best portfolios have assets which don't correlate to one another. In other words, when one asset class sinks another rises. Lately we have seen that when the market is doing well precious metals have been hit hard. In 2008 when the market tanked precious metals soared.
Asset allocation goes beyond diversifying and not putting one's eggs in one basket. It is based upon the belief that the market is fairly efficient and that we all flatter ourselves into believing that we can beat the S&P. Most proponents purchase passive index ETF's or funds and divide their portfolio into predetermined percentages based upon their wants and needs. The research seems to bear out that periodic rebalancing to keep the percentages intact increases returns and lowers risk.
I have been investing in dividend growth stocks in many sectors, REIT's, a BDC, muncipal bonds and cash. My desire to diversify has given me a head start in asset allocation but I would not like my portfolio to be scrutinized as of yet. I will look to add emerging market and international stock and bond exposure with an eye toward what is out of favor now. To the extent I can I will be looking for low expenses and monthly distributions. By buying what is out of favor now one can get the benefit of mean reversion.
The bottom line is that by spreading one's investments among multiple asset classes one can achieve greater returns with less risk. Relevant asset classes are domestic, international and emerging market stock (although I just read about a new category called "frontier" markets which include Africa and the like"), domestic and international government bonds, domestic and international corporate bonds, real estate (including REIT's), commodities, BDC's and the list goes on and on.
The best portfolios have assets which don't correlate to one another. In other words, when one asset class sinks another rises. Lately we have seen that when the market is doing well precious metals have been hit hard. In 2008 when the market tanked precious metals soared.
Asset allocation goes beyond diversifying and not putting one's eggs in one basket. It is based upon the belief that the market is fairly efficient and that we all flatter ourselves into believing that we can beat the S&P. Most proponents purchase passive index ETF's or funds and divide their portfolio into predetermined percentages based upon their wants and needs. The research seems to bear out that periodic rebalancing to keep the percentages intact increases returns and lowers risk.
I have been investing in dividend growth stocks in many sectors, REIT's, a BDC, muncipal bonds and cash. My desire to diversify has given me a head start in asset allocation but I would not like my portfolio to be scrutinized as of yet. I will look to add emerging market and international stock and bond exposure with an eye toward what is out of favor now. To the extent I can I will be looking for low expenses and monthly distributions. By buying what is out of favor now one can get the benefit of mean reversion.
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