In early 2001, I took SMI readers into my confidence and let them peer in as I put my personal retirement portfolio together for that year. Many wrote to say they found it greatly reassuring to learn that I'm practicing what I preach — that is, I'm using exactly the same strategies we recommend to our readers. Since then, it's become something of an annual event. So here goes:
The first step in my planning process is the most important — determining the portion of my holdings that will be invested in stocks versus how much in interest-earning (aka "fixed income") securities such as CDs, Treasuries, and bonds. It's the decision that will have the greatest impact on my returns for the year.
Looking at An Upgrading Overview: Easy as 1-2-3, Table 1, I find that we recommend only a 60% allocation to stocks for someone in my situation (five years or less until retirement). The rest would be invested in lower-risk fixed-income holdings. However, I'm choosing to reduce my stock portion even further — to just 40% of my portfolio. Why? Because the value of my ownership interests in the SMI newsletter and mutual fund businesses is tied to the performance of the stock market. That means these business interests are essentially like stock holdings in terms of risk. To offset that additional market exposure, I'm going with a lower stock allocation in my retirement portfolio. As we encourage you to do, I'm "personalizing" general SMI guidelines to my unique situation.
So, a 40% stock allocation will be my "normal" profile for 2012. But there's a wrinkle — SMI's "Bear Alert" indicator triggered in August 2011. Following the guidelines offered in Bear Markets and Boundaries, (May 2011 cover article), I temporarily sold my Upgrading-oriented fund shares and moved that money into no-load bond funds. So, that's where I stand as I begin the new year. As explained in the May article, I will revert to my normal 40% stock allocation once SMI's "All Clear" signal is sounded.
With my allocation decision made, we move on now to the three SMI strategies I'll be using in 2012:
• Fund Upgrading. As explained in our Performance Momentum and SMI's Fund Upgrading Strategy [PDF] bonus report, Upgrading is a great approach to equity investing. It's been SMI's recommended strategy for more than 15 years. So it likely won't surprise you to learn that the majority of my stock allocation continues to be devoted to Upgrading. Once again, I'll be using the Sound Mind Investing Balanced Fund (SMILX) as my vehicle. Given that the fund's portfolio is only 60% invested in stock-fund Upgrading (40% of its portfolio is in bonds — more on that shortly), I'll adjust the amount of dollars I invest there so that the net result gets me the stock exposure I want.
• Optional Inflation Hedges. I've decided to continue investing about one-fourth of my stock allocation in the OIH recommendations (shown on page 12), dividing it equally among the five areas. In 2010, such a portfolio would have returned +25.2%. Through the first 11 months of 2011, that strategy is off -3.8% (year-end figures aren't available yet). Nevertheless, with the possibility that the economic recovery will finally kick in this year, rising inflation remains a concern. This small position gives me added protection in that regard. (These are higher-risk holdings, but remember, 25% of my 40% stock allocation is only one-tenth of my total portfolio.)
• Sector Rotation. The final 15% of my stock allocation is going into this advanced strategy (available only to SMI web members). A form of Upgrading using narrowly focused sector funds, this strategy is also on the higher-risk side. It is down about 5% through November 2011, but has an average annual return above 17% over the past two decades.
• Bond allocation. The biggest piece of this will be provided by my position in the SMI Balanced Fund. This core holding is being supplemented with additional positions in short-term bond funds (for stability), inflation-protected bond funds (to further guard against the consequences of runaway federal spending), high-yield bond funds (reaching for higher returns but with added risk), and global bond funds (to invest outside the U.S. dollar). SMILX already includes these other bond types (except global bonds). I'm adding them separately only to boost the total bond percentage of my portfolio higher than the 40% provided by SMILX.
One of SMI's foundational principles is that your investing decisions should be made in accordance with a personalized plan. I've just laid out my plans for 2012. You don't need to do anything as complicated as this. Using only the Fund Upgrading strategy is good enough; it's got a great long-term track record. The important thing is that you come up with an investing approach shaped to fit your temperament, long-term goals, and level of understanding.