Home > Uncategorized > Allocation Adjustments For October 2011

Allocation Adjustments For October 2011

October 13, 2011 Leave a comment Go to comments

Although my allocation was most recently updated in January, I believe this is a good time to revisit it since the market has changed quite a bit. Given the size of my portfolio I don’t expect the changes to make a big difference in the dollar returns but it’s worth seeing what happens if I do this. The most important thing about this step is that it’s a chance to reconnect with the long-term principles I want to base my portfolio on.

Here’s the new allocation:

  • Bonds 10-15% (was 20% in January, at 14.3% today)
  • CDN index 25-27% (was 26.6% in January, at 27.3% today)
  • US index 30-33% (was 26.6% in January, at 29.5% today)
  • EAFE index 28-32% (was 26.6% in January, at 28.8% today)

And here are the index numbers:

  • DEX Universe Bond Index: Yield 2.55%
  • TSX: Dividend yield 2.83%, earnings yield 6.7%, P/E 14.85
  • S&P 500: Dividend yield 2.23%, earnings yield 8%, P/E 12.58
  • EAFE: Dividend yield 3.47%, earnings yield 6.9%, P/E 14.54

Just like the start of the year, the yield indicators for the 3 major stock indexes are fairly similar. However I have weighted them a bit differently for several reasons. The canadian market has had a good decade and may be benefiting from commodity prices now, so it might have a little more downside risk. However it has the short-term advantage of avoiding currency volatility. The US market is still home to some of the best companies and the canadian dollar was helping to buy more until recently; if it rebounds it may give another boost. The european market also has a lot of good international corporations and may be too pessimistic at the moment. It provides a good diversifier for the others too.

The big difference comes from bonds though. They have done too well (the 1-year return is around 7%), and now two indexes have dividend yields higher than the bond yield. Having a bond allocation at the start of the year has helped a lot. It could just as easily have dragged down returns though, and the current interest rates don’t interest me that much. I may be foolish in keeping a bit in case even better stock buying opportunities turn up but we’ll see.

Over the last few months I’ve taken advantage of days when stocks have dropped and bonds have risen to new highs to move small amounts from bonds into stocks. That’s why the bond allocation has drifted lower, and I may do additional small moves if the right opportunities come up. If the markets reverse themselves I’ll have locked in a bit of profit. I may have been too early but you never know when you’ll lose an opportunity to buy at lower prices because the bottom is at a different level every time. The real question is whether I’m making moves that increase the long-term value of the portfolio, and I strongly believe that trading out of something that’s been doing too well helps that.

I’ll implement the change by adjusting the amounts added starting next month to match this allocation, and otherwise continuing to make gradual moves as the market gives me opportunities. I’m trying ranges instead of fixed targets to see if that helps guide my decisions better. But in any case if I lose access to my portfolio for a few years I won’t be overly worried about how it’s doing.

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  1. Be'en
    October 14, 2011 at 6:22 am

    I see that you look at PE values of the indexes that are relevant when making adjustments to allocations. Would you look at PE10 (CAPE) values as suggested by some? Is there a site where the PE10 or CAPE are posted for the most popular indexes which also form the basis for various ETF offerings?

    Cheers.

  2. October 14, 2011 at 1:43 pm

    That’s definitely got value but unfortunately it’s a bit harder to get. Even finding the current P/E sometimes takes a few tricks. I know that’s a terrible excuse. If anyone knows a good source of information I would love to use it!

  1. December 22, 2012 at 6:18 pm

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