Asset Allocation

Asset Allocation

The asset allocation I follow for my Dividend Tactic Portfolio includes both fixed income investments and exposure to the equity market.  I utilize a common technique in which I take my age and equate that to the percentage of the portfolio tied to low risk fixed income products, with the balance dedicated to the inherently higher risk, higher reward equity market.

The advantage of this approach is that as my age increases closer to retirement my portfolio’s overall risk exposure is reduced, with no guess work involved!


Let’s start with the fun part, the equity investments.  I am getting close to the age of 31; therefore, nearly 69% of my investment portfolio is allocated to the equity market.  Knowing that is the easy part.  How to subdivide the 69% into various investments is a bit more tricky.

I recognized early on in my investment experience that the market is divided into major sectors.  The eleven major sectors I  recognize are as follows:

  • Financials
  • Energy
  • Utilities
  • Industrials
  • Mining and Materials
  • Telecommunications
  • Healthcare
  • Consumer Discretionary
  • Consumer Staples
  • Information Technology
  • Real Estate

Some may question why Real Estate is considered by me to be a major sector.  The easy answer is I want to own REITs within my portfolio, and this makes that possible.

So, with these eleven major sectors identified I needed to find a way to distribute the equity portion of my portfolio amongst them.  My first attempt was to try and follow what the investment bankers do, and weight each sector based upon their presence in the market.  This practice, called index weighting, is used by many successful mutual fund managers for balanced funds – and seemed like a good place to start.

With this approach I immediately I ran into a major problem and a violation of my principles – I do not know enough about the marketplace to decide which sector should have what percentage allocated to it, nor do I have the time to conduct frequent research to confidently manage this type of a sector weighting system.  After all, I recognize that human error is one of the root causes of problems that hinder investment success.  As a result, the answer became pretty clear to me – weigh each sector exactly the same.

So that is what I have done.  Within the equity portion of my portfolio, each sector has 1/11th of the total amount.  Makes managing this so much easier.

Now this 1/11th of the equity portion of my portfolio still means a considerably large amount of my overall investment is tied to a single sector.  To minimize the risk of “having all of my eggs in one basket” I created a supplemental rule – Hold a minimum of three equities in each sector, with a maximum amount per equity of $10,000.   This means that no one sector has more than 1/11th of my equity allocation, and no one stock has more than 1/33rd.  Simple, easy, and actually quite effective.  This is why my investment portfolio has exactly 33 equity holdings.

…I am also hoping that as my investment portfolio grows soon this will change to 1/44th, 1/55th and so on.

Fixed Income

Like I stated earlier, I am nearing the age of 31 so approximately 31% of my portfolio is in fixed income products such as Pensions, Precious Metals, and Cash.

Currently, I do not have a defined mathematical method for further breaking down this 31% of my portfolio into various fixed income assets, mostly due to the fact that I have the bulk of the 31% covered by pensions, only a small amount directly in precious metals, with the balance made up by cash within interest paying savings accounts.  As the value of my portfolio grows I may need to address this with a further rule, but for now I feel that my current position in this area is sound.