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Portfolio Allocations Over Time


Chowder stirred the pot, announcing a shift towards higher-growth stocks in his son's portfolio.

I like this move, given his son's age and goals, and in fact it brings his strategy closer to my own.

My own allocations and strategy have changed over time.

I classify our investments into "risk equity" (most stocks), "income equity" (real estate and utility investments held primarily for their stable income generation), and "pure income" (cash, CDs, bonds, and guaranteed-principal accounts that generate income but not growth). Our allocations are set by the investment plan, and maintaining the target allocation is considered a primary goal. Deviations from the target are considered carefully and are only temporary.

As you can see in the chart above, there was an abrupt change in allocation in 2007. We had previously targeted 80% risk equity, 10% income equity, and 10% pure income. Our investments were sufficiently strong at the time that I was able to construct a retirement plan requiring less than 4% real growth to exceed our targets. At the time I was expecting 6% real growth from the risk equities, 4% real growth from the income equities, and 2% real growth from the pure income investments (remember when TIPS yields started with a 2-handle?). Thus we were able to significantly de-risk the portfolio, and still draw a clear line to financial freedom in 25 years.

The allocations next changed from 2009-2011, this time in response to market forces. Interest rates collapsed, so our plan to build a portfolio of TIPS no longer made financial sense. We sold those we had already purchased (at a fat gain, since bond prices move inversely to yield) and instead turned to high-quality dividend stocks to support the plan. The market crash boosted the premium for holding equities, so over the course of three years we shifted our portfolio aggressively in that direction. To balance the increased investment risk, we paid off our mortgage -- leaving us with fewer fixed-income assets but no further fixed-income obligations.

We revisited the investment plan in 2012, and set it on a path that it continues to follow to this day. The "risk equity" allocation has intentionally been drawn down (though in absolute dollar amounts it continues to establish new highs), with the proceeds from that trimming used to build out positions in real estate, utilities, and long-term fixed income investments.

The "pure income" allocation likely peaked in 2017, with a lump-sum purchase in a guaranteed-principal annuity account. This guarantees sufficient income to bridge our needs from retirement to Social Security at full retirement age or later. We will not be adding further to this account, though it will continue to grow at roughly 4% per year. Our real estate allocation is also nearing the eventual target of 10%, though our utility positions will continue to be built out to that level over the next few years. Once that is accomplished, the "risk equity" allocation will be allowed to grow again -- because there can be no risk once the needs are met with guaranteed funds and a high quality income stream.

In theory, the fixed income allocation should peak in the years just before or just after retirement. Our fixed income allocation may be peaking ten years earlier, but only because we are sufficiently far ahead of plan to make that a conservative path towards achieving our goals.

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