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Diversification of assets
Old 09-04-2008, 01:36 PM   #1
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Diversification of assets

Over the last few years I have been rethinking my asset allocation.

I have come to several conclusions based on my research and education. Yes, I have read all the books on asset allocation, know the historical relevance of international asset allocation for a portfolio, but canít help thinking that Japan and Europe are going to languish for various reasons.

1. I have reallocated all my resources only to stocks and exchange traded funds that pay income or dividends. I have concluded there is a greater propensity for security from income producing investments than growth funds. I am willing to sacrifice greater growth for stability that the dividend provides as a floor during volatile markets.

2. I have moved my asset allocation away from international stocks to North American stocks with international exposure or areas servicing foreign countries. Resources, specifically diminishing ones such as oil stocks are my favourite, but financial and insurance companies are up there as well (I am speaking of Canadian banks and Insurance companies which are providing good returns and stable cash flow).

Any one else re-evaluating their foreign component?
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Old 09-04-2008, 02:41 PM   #2
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I have been 25% foreign for some time. It was tempting to increase over last 2-5 years, but holding at 25% for forseeable future.
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Old 09-04-2008, 04:35 PM   #3
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Originally Posted by Canadian Grunt View Post
Over the last few years I have been rethinking my asset allocation.

I have come to several conclusions based on my research and education. Yes, I have read all the books on asset allocation, know the historical relevance of international asset allocation for a portfolio, but canít help thinking that Japan and Europe are going to languish for various reasons.

1. I have reallocated all my resources only to stocks and exchange traded funds that pay income or dividends. I have concluded there is a greater propensity for security from income producing investments than growth funds. I am willing to sacrifice greater growth for stability that the dividend provides as a floor during volatile markets.

2. I have moved my asset allocation away from international stocks to North American stocks with international exposure or areas servicing foreign countries. Resources, specifically diminishing ones such as oil stocks are my favourite, but financial and insurance companies are up there as well (I am speaking of Canadian banks and Insurance companies which are providing good returns and stable cash flow).

Any one else re-evaluating their foreign component?
No, but if I see much more of this kind of thought going around I'll take that as a pretty good signal of a bottom, or at least a great buying opportunity. Capitulation and all that, you know. "Death of Equities" at the beginning of the '80s, etc.

In all seriousness I think that you're falling prey to the natural human tendencies and should instead stick to the disciplined asset allocation approach. If it feels bad you probably know it's right, and vice versa.
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Old 09-04-2008, 04:50 PM   #4
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I have been 25% foreign for some time.
ditto. i was intrigued by those (seemingly) many folks who were going to 50% (and some higher), no doubt (or at least i had concluded) the increase in weightings in recent years was simply performance chasing. i have no intention to change.
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Old 09-04-2008, 05:09 PM   #5
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ditto. i was intrigued by those (seemingly) many folks who were going to 50% (and some higher), no doubt (or at least i had concluded) the increase in weightings in recent years was simply performance chasing. i have no intention to change.
Indeed. And those who were "chasing" higher recent performance in foreign stocks and emerging markets are taking a bath.
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Old 09-04-2008, 05:16 PM   #6
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Definitely some similiarities in my AA, though I have not made significant changes in the face of the downturn. 50/50 equities/fixed income. Approx. 1/3 of equities are international, generally developed countries. I like dividends and have had a strong value tilt for years. Research and common sense say it's where to be for the long term.
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Old 09-04-2008, 05:28 PM   #7
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I use dividends at the center of my asset allocation to begin with- 45% of my investments are in one equity income fund.

But to use a down market to change allocation is probably not wise, unless you stick with allocation for remainder of your accumulation phase.
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Old 09-04-2008, 07:47 PM   #8
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Originally Posted by Canadian Grunt View Post
Over the last few years I have been rethinking my asset allocation.

I have come to several conclusions based on my research and education. Yes, I have read all the books on asset allocation, know the historical relevance of international asset allocation for a portfolio, but canít help thinking that Japan and Europe are going to languish for various reasons.

1. I have reallocated all my resources only to stocks and exchange traded funds that pay income or dividends. I have concluded there is a greater propensity for security from income producing investments than growth funds. I am willing to sacrifice greater growth for stability that the dividend provides as a floor during volatile markets.

2. I have moved my asset allocation away from international stocks to North American stocks with international exposure or areas servicing foreign countries. Resources, specifically diminishing ones such as oil stocks are my favourite, but financial and insurance companies are up there as well (I am speaking of Canadian banks and Insurance companies which are providing good returns and stable cash flow).

Any one else re-evaluating their foreign component?
Good thread. I have also been evaluating my asset allocation this year as my primary responsibility as I start year 2 of ER. I welcome the chance to compare notes.
I do have a majority of my assets in equities.

1. The pro dividend, anti growth stance is an interesting one. I currently focus on the fund manager or I go with an index fund. I currently have no dividend /growth allocation. I have a lot of growth. I may need to rethink this.

2. I have close to half of my assets overseas. In the near term (next few years) there will be more of an inflation concern here than in Europe. Going forward, I believe that the US dollar will weaken relative to other currencies. Inflation is one way to reduce the large debt from war and social programs.

I have 20% in emerging markets. My background is in manufacturing and I see more manufacturing going overseas. Any time I become concerned about this, I take a walk through Home Depot and Walmart and look at who makes the products on the shelves. This is my evidence that the current position is still correct and it steels my resolve.

I am starting to slowly build a Resources allocation.

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Old 09-04-2008, 07:58 PM   #9
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Originally Posted by Canadian Grunt View Post
Over the last few years I have been rethinking my asset allocation.

I have come to several conclusions based on my research and education. Yes, I have read all the books on asset allocation, know the historical relevance of international asset allocation for a portfolio, but canít help thinking that Japan and Europe are going to languish for various reasons.

1. I have reallocated all my resources only to stocks and exchange traded funds that pay income or dividends. I have concluded there is a greater propensity for security from income producing investments than growth funds. I am willing to sacrifice greater growth for stability that the dividend provides as a floor during volatile markets.

2. I have moved my asset allocation away from international stocks to North American stocks with international exposure or areas servicing foreign countries. Resources, specifically diminishing ones such as oil stocks are my favourite, but financial and insurance companies are up there as well (I am speaking of Canadian banks and Insurance companies which are providing good returns and stable cash flow).

Any one else re-evaluating their foreign component?
this mostly sounds like another flavor of market timing. I aim to maintain 15% of my equities in international.

I'm not smart enough to know things like inflation is going to be higher here than in europe or that europe and japan are about to languish for various reasons so I'll just stick to indexing the world and rebalance occaisonally to my chosen AA
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Old 09-04-2008, 08:45 PM   #10
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I'm sticking to 50% foreign. I've definitely been lagging the US markets with this AA this year, but I have a couple of years of beating the US before this year. I've had a few opportunities to rebalance into US equities in the past, and I'm just about at a trigger point to rebalance into EM and foreign small-caps now. Seems like its doing what I want it to.
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Old 09-04-2008, 10:03 PM   #11
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Canadian Grunt,

My asset allocation is usually 33% international, including 23-25% international equity and 8-10% global bonds (LSGLX). This (managed) global bond fund is actually increasing its allocation to US$ (around 45% right now). I am not changing my overall allocation to international stocks, even though I am very slightly decreasing my allocation to developed markets and increasing my allocation to emerging markets.

As far as dividends go, I believe that dividends are an important part of overall market returns so I do own many investments paying dividends including a few equity funds. Overall my portfolio has a 3.4% yield (including bonds, REITs, cash and stocks). But unlike you, I don't believe that dividend paying stocks are necessarily any safer than growth or any other stocks. Look at DVY, a popular dividend-paying equity ETF, down almost 21% in the past 12 months as compared to the S&P down "only" 15% over the same period.
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Old 09-05-2008, 09:59 AM   #12
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"Look at DVY, a popular dividend-paying equity ETF, down almost 21% in the past 12 months as compared to the S&P down "only" 15% over the same period."

True, but the dividend "checks" keep on coming without liquidating principle.
This is a comforting feature for some of us already retired.
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Old 09-05-2008, 10:20 AM   #13
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To clarify my original statement. I am not abandoning the foreign component of my assets. What I am proposing is looking at this component differently than what a traditional mix would consist.

1) I have faith in western law and corporate practice. There are a few bad apples but I trust what I can see, and where I have recourse.

2) Emerging markets require technology and resources to expand. Neither India nor China has these resources on their turf.

3) I propose the foreign component be made of companies servicing emerging markets. Insurance, financial, infrastructure companies and resource companies. As oil is global and western oil company becomes a foreign component without the political risk.

I changed my foriegn component focus three years ago and I
have enjoyed great benefits. Historically this has worked well for many years. Examples are GE, Exxon, Reinsurance companies, Shipping, etc.

Just my thoughts to bring something new to the asset mix discussion.
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Old 09-05-2008, 11:19 AM   #14
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True, but the dividend "checks" keep on coming without liquidating principle.
"Principle" = principal. (Sorry, not trying to be nitpicky, but I see this mistake often, and it's one of my pet peeves)
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Old 09-05-2008, 11:27 AM   #15
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"Principle" = principal. (Sorry, not trying to be nitpicky, but I see this mistake often, and it's one of my pet peeves)
Hint: when in doubt, use "principill". Folks will think it's just a typo.
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Old 09-05-2008, 03:09 PM   #16
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True, but the dividend "checks" keep on coming without liquidating principle.
This is a comforting feature for some of us already retired.
That may be a valid reason for owning dividend-paying stocks (I happen to agree with it anyways). But, IMO, one should not be owning such stocks because "the dividend provides a floor during volatile markets" as stated by the OP. It doesn't always work that way.
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