Your portfolio allocation plan needs to change because of gigantic shifts in valuations of bonds and stocks. Every investor should consider price in their asset allocation decisions. Why would you buy more of an investment when the price and risk is high; and less when the price and risk is low?
Those of you that follow this blog know it is about educating and empowering investors to manage their own money. I am not a prognosticator; in fact, I have written articles decrying listening to anyone that tells you they know what the market is going to do.
I frequently tell subscribers of my premium service that I don’t know what the market will do next week, or next month, or even next year. But I can assess the risk and probabilities based on research, facts, and history.
Base Your Asset Allocation Plan On These Concepts
We know we can be successful value investors when we base our portfolio allocation plan on these concepts:
Reducing risk with asset allocation to mitigate systematic risk; and owning a variety of industries and stocks to mitigate unsystematic risk.
Reducing risk by investing in assets at a low enough price that the odds of meeting or exceeding your required rate of return are heavily in your favor. The foundation of margin of safety is price matters.
Where Are We Today
Bonds have the lowest yield and highest price in history today. That means the reward for owning bonds is at a record low and the risk of owning bonds is at record highs.
Investors have experienced a 32 year bull market in bond prices during which time the 10 year Treasury Yield has fallen from over 14% to less than 2% today. Yields are now lower than at the height of the Great Depression.
Yet retail investors are pouring billions of dollars into bond ETFs and mutual funds. So not only are they accepting high risk for low reward but they are paying management fees that make the yield even lower!
Don’t you think you should re-evaluate your bond portfolio allocation plan based on these facts?
Readers of the AAAMP Blog know I’m a big proponent of stocks. Stocks are one the best ways to participate in a growing economy and build long term wealth. However, you will be much more successful when you follow value strategies the keep your risk low.
Stocks have been in a 12 year bear market with a wide trading range. A more than 100% rally from the March 2009 low puts the market near the top of that trading range.
Should you be buying at the top? Now is a good time to reevaluate your stock portfolio allocation plan!
Review Your Portfolio Allocation Plan
It just makes sense to own more of investment assets at bargain prices when the risk is lower; and own less of investment assets when they are expensive and risk is higher. Review your portfolio allocation plan as asset prices change. This will allow you to lower your risk and increase the probability of positive outcomes.