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The Belgian Dentist Asset Allocation: Monthly Portfolio Update

Summary

  • In January, the expected return for equities declined slightly and remained constant for bonds.
  • The modified duration of equities and bonds was virtually unchanged.
  • As a result, there are no changes to the asset allocation.

This article gives you more details about the Belgian Dentist's value investing approach to asset allocation. Today we update you on our current expected return-figures and their impact on our asset allocation.

Expected returns

Our current expected return estimates can be found in Table 1.

For cash and (government) bonds the prospective return is simply the current yield and for equities we use the model from the website Philosophical Economics based on the average investor portfolio allocation to equities.

Table 1: Expected returns

Asset Allocation

How do we determine the asset allocation between cash, bonds and stocks? We use the idea proposed by John Hussman to equal the total portfolio (modified) duration and the investment horizon. The calculation of duration for cash and bonds is straightforward and for equities this can be approximated by using the inverse of the dividend yield.

So our algorithm maximizes the expected return with the constraint that the total duration cannot exceed the investment horizon.

Table 2: Changes to input-parameters

As a result, the allocation to equities was modestly lowered in favor of bonds.

Table 3: Current asset allocation

Table 4: Previous month asset allocation

Table 5: Asset allocation changes

Conclusion

There are this month no changes to the asset allocation

How will the Belgian Dentist perform in 2017? We don't know. It depends on what the equity markets will do. If they tank, the Belgian Dentist will outperform. If they continue to rise, we will underperform them, but in that case we expect to deliver positive, absolute returns. In both cases, we are happy!

Disclaimer

This article provides opinions and information, but does not contain a recommendation or personal investment advice to any specific person for any particular purpose. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

Back-tested performance is hypothetical and does not represent actual performance, should not be interpreted as an indication of such performance and is not a guarantee of future results.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.