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You see and hear a lot of talk about overweighting stocks, but there is little good information regarding how to do this. There should be a tool you can use on your own to determine how much you should overweight. Herein, I present such a tool. You do not need to use the exact tool I am presenting, but you should have something like it.

 

 

Current Age

Balanced Portfolio

Maximum Bonds Under-weight %

Under-weight Execution %

Weighted Portfolio

Stocks %

Bonds %

Stocks %

Bonds %

0

100.00%

0.00%

0.00%

70.65%

100.00%

0.00%

10

90.91%

9.09%

8.26%

70.65%

96.75%

3.25%

20

81.82%

18.18%

14.88%

70.65%

92.33%

7.67%

30

72.73%

27.27%

19.83%

70.65%

86.74%

13.26%

40

63.64%

36.36%

23.14%

70.65%

79.99%

20.01%

50

54.55%

45.45%

24.79%

70.65%

72.06%

27.94%

60

45.45%

54.55%

24.79%

70.65%

62.97%

37.03%

70

36.36%

63.64%

23.14%

70.65%

52.71%

47.29%

80

27.27%

72.73%

19.83%

70.65%

41.29%

58.71%

90

18.18%

81.82%

14.88%

70.65%

28.69%

71.31%

100

9.09%

90.91%

8.26%

70.65%

14.93%

85.07%

110

0.00%

100.00%

0.00%

70.65%

0.00%

100.00%

The first column is your current age. The figures in the column range from 0 to 110 because I am assuming you have determined 110 to be the oldest age you may live to. You may live to be older than 110, but it is extremely unlikely―even though life expectancies are increasing. You can/should use an oldest age different than 110, if this is more appropriate for you. Here is a Wikipedia location listing the oldest people ever.

The Bonds % in the third column is simply your current age divided by the oldest age you may live to. The Stocks % in the second column is simply 100% minus the Bonds %. These are the standard stocks-to-bonds portfolio allocation calculations.

The fourth column, Maximum Bonds Underweight %, is the largest amount by which you can underweight bonds. I calculated this by multiplying the standard Bonds % by the standard Stocks %. There is important reasoning behind this calculation.

The older you are, the more important it is for you to stay close to the standard Bonds %. Stocks are more prone to move up or down in value than bonds. For example, the S&P 500 fell 57% during the last U.S. recession. In your latter years, you begin to live off of the principal some; and there is less time remaining in your life for your portfolio to recover from losses. When you are older, you do not want to stray far from the standard Bonds % on a percentage basis. If you are young enough, having no bonds in your portfolio may not be an issue.

The fifth column, Underweight Execution %, is the amount of the Maximum Bonds Underweight % you are executing. The 70.65% figure comes from some calculations I did to estimate exactly how unattractive bonds are now in relation to stocks. Basically, interest rates a very low, but they could be lower; and stocks are largely underpriced.

The "stocks are largely underpriced" statement may seem surprising to you. Vanguard Total (U.S.) Stock Market ETF (NYSEARCA:VTI) has a price-to-earnings ratio of 14. Vanguard Total International (Non-U.S.) Stock Index ETF (NASDAQ:VXUS) has a price-to-earnings ratio of 11. The average S&P 500 price-to-earnings ratio, over time, has been 15. This does not make a case for largely underpriced. However, with interest rates this low; the stock markets should be trading at much higher multiples. You do not need to use the exact Underweight Execution % I presented. You can estimate and apply your own percentage.

Columns six and seven show your Stocks % and Bonds % after stocks have been overweighted and bonds have been underweighted. The Bonds % is the standard Bonds % minus the Maximum Bonds Underweight % times the Underweight Execution %. The multiplication is performed first. The Stocks % is simply 100% minus the Bonds %.

In addition to or instead of holding individual stocks, there are many good index ETFs you can use for your overweighted stock position. Among these are VTI and VXUS, which I mentioned above and recommend. Also among these are funds like iShares S&P 100 Index (NYSEARCA:OEF), SPDR S&P 500 Index (NYSEARCA:SPY), iShares Core S&P 500 (NYSEARCA:IVV), Vanguard S&P 500 (NYSEARCA:VOO), iShares Russell 2000 Index (NYSEARCA:IWM), iShares Core S&P Small-Cap (NYSEARCA:IJR), and Vanguard Small-Cap (NYSEARCA:VB), which I do not favor because I recommend weighting toward mid-cap, versus large-cap or small-cap, stocks. You can use ETFs like iShares Core S&P Mid-Cap (NYSEARCA:IJH), iShares Russell Mid-Cap Index (NYSEARCA:IWR), and Vanguard Mid-Cap (NYSEARCA:VO) to weight toward the mid-cap space and own a more equal amount of each company you own via ETFs.

Source: Your Retirement Investments: How To Overweight Stocks

Additional disclosure: I manage a portfolio with positions in VTI, IWR, IJH, and VXUS.