Your Portfolio Allocation Plan Needs to Change Because of These Facts

by KenFaulkenberry

in Asset Allocation

Portfolio Allocation Plan

Portfolio Allocation Plan

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:

1. Investment Decisions Based on Valuation

Both your asset allocation and your individual investment decisions should be valuation-based.

2. Margin of Safety

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 historically low yields and high prices today.  That means the reward for owning bonds is near a record low and the risk of owning bonds is near record highs.

Investors have experienced over 3 decades of rising bond prices during which time the 10 year Treasury Yield fell from over 14% to less than 2% in 2012.

Yet retail investors have poured 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.

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.

Related Reading:

Why Tactical Asset Allocation is Changing the Investment World

Perceived Risk vs. Real Risk: A Key to Successful Value Investing

Written by KenFaulkenberry


AAAMP Blog by Ken Faulkenberry
Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record.
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HI Ken, excellent advice at a time when so many seem to be almost blaise about the future direction of the financial markets. Everyone should read what you wrote about bonds two or three times and let it sink in deep. Historic peaks and valleys are the best “tea leaves” when it comes to estimating future direction. “Yields are now lower than at the height of the Great Depression…” I somehow think that in the very near future we’re going to look back and realize how much we underestimated what that meant.

Since stocks will very likely follow bonds, what do you think is the best diversification right now?

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