As we discuss our suggested portfolio allocations for 2016, 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 invest in stocks, the greater the potential for growth but also the greater the risk.
In determining your stock/bond allocations, it’s important to consider your personal goals and risk tolerance. We’ve provided step-by-step instructions 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 either Just-the-Basics or Upgrading, you should make any stock/bond allocation changes only in accordance with your long-term plan, and only as a thoughtful response to changes in your circumstances (perhaps your age now puts you in a different “season of life” category) or significant changes in your financial goals or fortunes. Target allocations should not be altered emotionally due to recent activity in the markets.
If you’re a Just-the-Basics investor, you can easily rebalance for 2016 simply by adjusting 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.)
If you’re following the DAA strategy, you don’t need to undertake any rebalancing tasks, other than perhaps to rebalance the mix between DAA and any other strategies you may be using. (See A Few More Thoughts On Rebalancing for more on rebalancing a DAA portfolio.) For example, someone dividing a portfolio evenly between DAA and Upgrading may need to rebalance slightly to get those two strategies back in balance.