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Forum List » Income Investors' Forum Ideas for Income Investors. High Dividend Stocks, Mutual Funds etc.  
Asset Allocation for Income Investors
Posted by: Dividends4Life
(IP Logged)
Date: November 7, 2012 11:44AM
When to buy a stock and at what price are very important decisions. However, serious investors will tell you the most important decision is how you allocate your assets. As I approach retirement, I routinely step back to consider my asset allocation and how well it is working for me. The first significant question you have to answer is how much do you allocate to equities and cash/fixed income. There are many approaches to answer this question, but the vast majority of investors use one of these two approaches: Quote:For my allocation, I chose to implement option II. However, given the low interest rates and the certainty of higher interest rates in the future I have reduced my bond allocation to a bare minimum. As a reminder, interest rates and bond prices have an inverse relationship: As rates rise bond prices decline. After determining your equity/fixed income split. The next step is to decide what type of investments belong in the equity portion of your allocation. Traditional splits are based on capitalization (large/mid/small cap), origin (domestic versus international) and sectors such as financials, health care, energy, etc. I chose a mixture of all the above. I look at 11 sectors as defined by Morningstar. In addition, I look at origin and capitalization. I review my allocation on a quarterly basis. You will notice the targets are not clearly defined. After much modeling back in 2009, I finalized my allocation. As I am apt to do, I put together an Excel model (D4L-Calc-Asset-Allocation.xls) for illustrative purposes of modeling my asset allocation over time. You may want to use it as a starting point for developing your asset allocation. Here is a quick overview of how to use the model: Input Section
Looking at the Asset Allocation - Capitalization section, Cash/Fixed Income at 30% and Employer Equity at 10% are as calculated above. Small/Mid-Cap at 15% is input, leaving Large-Cap as a plug to make the section total to 100%. Periodically, you will need to reevaluate the appropriateness of the Small/Mid-Cap allocation since it does not automatically adjust annually. Let's consider some sample investments that would fall into each of these categories: Cash/Fixed Income:
The securities listed above under Equities-Domestic are all Large-Cap. Small/Mid-Cap:
Obviously, this would include stock in the company you work for. It would also include stock options, Stock Only Stock Appreciation Rights (SOSARs) restricted stock and company match stock in your 401(k). As Charlie Munger, Warren Buffett’s long-time friend and partner said, "Allocate assets wisely. Proper allocation of capital is an investor’s No. 1 job." Full Disclosure: Long JNJ, KO, MMM, GPC, PNY in my Dividend Growth Portfolio and VWO in my International Portfolio. See a list of all my dividend growth holdings here. Related Articles - A Diversified Approach To International Dividends - 9 High-Yield Dividend Achievers With 25 Years of Increases - 7 Dividend Stocks For A Confident And Secure Future - 7 High Yielders With A Low Free Cash Flow Payout - Wealth is a Journey, Dividend Stocks Can Take You There
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