As we discuss our suggested portfolio allocations for 2015, remember that the most important characteristic of your portfolio — the factor that influences the performance of your portfolio more than any other — is the way you divide your money between asset classes.
SMI’s core strategies approach this quite differently. Dynamic Asset Allocation (DAA) doesn’t require you to choose an allocation, as the strategy shifts the portfolio allocation automatically based on market conditions. In contrast, the starting point for Just-the-Basics (JtB) and Fund Upgrading is to determine how much of your portfolio should be allocated to investments in which you are an owner (stocks) and those where you are a lender (bonds). The more you put into stocks, the greater the potential for growth but also the greater the risk.
In determining your stock/bond allocations, it’s important to carefully consider your personal goals and risk tolerance. Step-by-step instructions are provided to lead you through this process in the Start Here section of the SMI website. At the end of that process, you’ll have stock and bond allocation percentages based on your investment time frame — that is, how long before you will need to begin withdrawing your money for living expenses. If you are following JtB or Upgrading, allocation changes should be made only in accordance with your long-term investing plan, and only as a thoughtful response to significant changes in your financial goals or fortunes. Target allocations should not be altered emotionally based on recent activity in the markets.
Turning our attention to 2015, Just-the-Basics investors can easily rebalance: Simply adjust your current holdings to match your desired stocks vs. bonds percentage allocations. (For a primer on rebalancing, see Is Your Portfolio Out of Balance? The Just-the-Basics portfolio mix is permanently fixed.)
Those following DAA need not undertake any rebalancing tasks, other than perhaps to rebalance the mix between DAA and any other strategies they may be using. (See A Few More Thoughts On Rebalancing for more on rebalancing a DAA portfolio.) For example, someone dividing his or her portfolio evenly between DAA and Upgrading may need to rebalance slightly to get those two strategies back in balance.
It’s Upgraders who have an additional step — dividing their money among the various stock- and bond-risk categories. Our suggestions for 2015 are shown in the table below. The table is set up as a “risk ladder” — the safest categories are at the bottom and risk increases as you move up.
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