Home Bonds

Target Asset Allocation for Investment Portfolio

Post on: 26 Июнь, 2015 No Comment

Asset allocation (AA) is an important part of portfolio design, and I like pinning down a target asset allocation for personal reference. This helps keep me focused as my portfolio shifts over time and makes it easy to re-balance back. For some educational posts on this topic, please refer to my asset allocation starter guide .

Below is my updated target asset allocation. Here is my target asset allocation from 2008. Its not dramatically different, but Ill try to explain the slight changes below. This is just my own AA, and I think everyone should develop their own based on their own beliefs and learning. If you just copy someone elses without thinking, when things go awry you wont have the foundation to stick to your guns. I have been strongly influenced by the writings of Jack Bogle. William Bernstein. David Swensen. Rick Ferri. and Larry Swedroe .

Stocks

I separate things out first into stocks and bonds, and then later its easy to go 60% stocks/40% bonds and so on. Heres my stocks-only breakdown:

I now do a 50/50 split between US and International stocks. In general, I would like to mimic the overall world investment landscape. On a market cap basis, the US stock market is now about 45% of the world, while everyone else takes up 55%. 50/50 is just simpler, with a slight tilt towards domestic stocks.
I consider REITs a separate real estate asset class. I used to put Real Estate under US stocks since I only held US Real Estate Investment Trusts (REITs), but in the future I would be open to investing in foreign real estate as property laws improve and investing costs drop.
On the US side, I add some extra small-cap value companies. Historically, adding stocks of smaller companies with value characteristics (as opposed to growth) has improved the returns of portfolios while lowering volatility. There is debate amongst portfolio theories as to why this happened and if it will continue.

If you buy a total market mutual fund or ETF, youll already own many of these types of companies (although many will not be held due to their small size relative to the big mega-corporations). I feel this adds a bit of diversification.

On the international side, I add a little extra exposure to emerging markets. You may be surprised to know that emerging countries like China, Brazil, Korea, India, Russia, and Taiwan already make up 26% of the worlds markets when you remove the US. These are countries that have a greater potential for growth, but also lots of ups and downs. I add a little bit more than market weight for these as well.