Nature Hike

Do You Have An All Weather Portfolio?

in Investing by

Over the Labor Day weekend I got the opportunity to hike a 14er with some friends. Hiking a 14er – mountain peak above 14,000 ft. – is one of the must-do things in Colorado for the challenge and picturesque views you are rewarded with. We drove out to Minturn CO, which is right outside Vail, to camp and hike the next day. When we left at about 5:30am to start the hike the forecast called for sunny skies that day.

Having done a few 14ers, I’ve learned that weather can come in very quickly and there are a few things you always bring – regardless of the weather forecast. Sure enough our sunny forecast turned into rain, sleet and then snow. But having the proper equipment for these conditions allowed the journey to continue.

Being a big believer in having a diversified portfolio, I couldn’t help but think of the parallels from this hike. There have been a lot of sunny days in the stock market recently and it’s easy to forget the weather can change quickly. Just like how I can’t go back down to camp when the weather changes to get some more appropriate gear, investors cannot decide they wish to be more diversified when the weather in the stock market has already changed.

Markets move too fast to think you can wait for a sign that it’s time to hedge. You have to have the appropriate gear with you on the hike and you have to be diversified at all times. It’s easy to forget the cyclical nature of investments and want to invest in what has done well recently. Lately large-cap US stocks have done very well, but sometimes it’s small-cap stocks or bonds or international stocks that lead the way. Here is a snapshot of various asset class returns.

The two portfolio examples below are dependent on your risk tolerance, time horizon, investment knowledge and total assets. It’s best to talk to a Personal Capital Financial Advisor to figure out what works best for you.

Growth Portfolio

A long term growth allocation with moderately lower volatility than an all stock portfolio. This allocation is often suggested for those who are several years from retirement or who need or want high growth in retirement.

Growth Portfolio Allocation

Moderate Portfolio

A long term growth allocation with notably lower volatility than an all stock portfolio. This allocation is often suggested for conservative investors in their working years or moderate investors approaching or in retirement with some need for growth.

Moderate Portfolio Allocation

Stay Diversified

It’s important to have exposure to multiple areas and to stay disciplined in being exposed to them. Trying to load up on the market segment that has done well recently or trying to guess which one will outperform going forward is a fool’s game. Stay diversified. Predicting the weather at 14,000 ft. is no more reliable than predicting where the stock market will go.

And sometimes it snows in August.

Cold Hike

Same hike – where did all the sunshine go?

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Chris Carucci, CFP®

Chris Carucci, CFP®

Chris has 10+ years of experience in the financial services industry. Prior to Personal Capital, he was a Supervisor and Broker for Scottrade. He has completed his Master of Business Administration (MBA) from the University of Colorado and has earned the Certified Financial Planner ™ designation. Outside of the office, Chris enjoys running, hiking, skiing and other outdoor activities.
Chris Carucci, CFP®

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4 comments

  1. Greg Mariano, Jr.

    What is the acceptable asset allocation for a 75 year old, retired CONSERVATIVE INVESTOR whose primary goal is capital preservation with potential for growth to avoid outliving his portfolio? Your article article only covered two groups: (1) GROWTH (2) MODERATE. Thanks.

    Reply
    • Chris

      Hi Greg

      A portfolio built on capital preservation might have about 20% more bonds than a Moderate Portfolio and 20% less stock. This allocation is designed to provide long term returns which are better than cash, with low volatility and limited upside.

      Reply
  2. George

    I’ve come to the conclusion that bonds aren’t worth holding as an asset in a portfolio in these very low interest rate environments except as an alternative to hold cash long term. I feel you have to be a sophisticated bond trader to take advantage of bonds. The only place I see for bonds in a retail investor’s portfolio are if they are held until maturity and even then, interest rates are too low to offer any gain. So bonds seems like a loss to me. If they are not held until maturity, then you may sell them at some point implying a bond trade that may lead to some loss of principle as interest rates are very low right now. If the suggestion is to hold a bond fund, then bond funds are as risky as stocks too as investors found out last year in May. Bond fund holders can get hammered as badly as stock fund holders.

    So in summary, the bond options for a retail investor are

    1. Hold a bond till maturity: Principal guaranteed but interest is too low guaranteeing a loss to real world inflation and not too easy to get hold of a bond when they come out as a retail investor.
    2. Hold a bond fund: As risky as stocks and depends on the management capability of the bond fund manager.

    So in my assessment and opinion as a long term retail investor with cash flow from a salaried job and an investing horizon of 30 years, I’ve adopted the dividend growth model since 2012 with no allocation to bonds and 3% to 5% cash position.

    1. Dividend Growth Stocks are bought based on fundamental analysis.
    2. The cash position is regularly invested in dividend growth stocks that have been analyzed from a fundamental level and have a history of increasing dividends.
    3. Most holdings should have increased or maintained their dividends during the 2008/09 crisis indicating that they are managed sufficiently well to have cashflow during a crisis.
    4. The stock picks are split between growth companies that have low dividends yet pay increasing dividends and value companies that high dividends. Both growth and value companies should have a history of growing dividends or sufficient cash flow and earnings growth to sustain dividend increases. In this way, the portfolio on an overall basis has moderate growth and moderately high dividend yield (>4%). So the total return benchmark will be measured against the S&P500.
    5. The regular and annually increasing dividend cash flow can be reinvested back into the holdings and also provides a margin of safety during bear markets and downturns.
    6. The portfolio is overweight energy, healthcare and staples as these are sectors needed during both bull and bear markets. There is also exposure to technology, discretionary, financials, utilities, industrial and REITs to counter balance the overweight sectors and capture growth and cash flow from these sectors too.
    7. A 3% to 5% cash position has a minor advantageous purpose to reduce the volatility during negative market swings and act as dry powder when opportunities present themselves.
    8. This portfolio is more inclined towards growth and cash flow over short to medium term capital preservation concerns. The assumption is that since you are salaried, you have separate emergency fund and will not be dipping into your investments with the long term in mind.

    So this is my “all weather” portfolio as a salaried retail investor with a long term horizon. The dividend cash flow and reinvestment helps to ignore volatility and bear markets while capturing growth in bull markets.

    Reply
  3. Greg Mariano, Jr.

    The asset allocations are in graphs. Could you possibly put them in actual figures, percentages for the moderate portfolio and on portfolio built on capital preservation which you said might have 20% more on bonds than a Moderate Portfolio and 20% less stocks? Thanks.
    Greg

    Reply

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