It’s time to review your asset allocation

If your investment time horizon is shortening, or you don’t like volatility, you might want to consider a change in your asset allocation to reflect the riskier outlook for equities.

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If your investment time horizon is shortening, you might want to reduce your asset allocation to reflect a riskier outlook for equities.

With a murky global economic outlook and an aging business cycle, it’s a good time to review your asset allocation to determine whether it’s still suitable for you.

In the recent past, we’ve suggested the following asset allocation for a ‘balanced’ investor: 60 per cent equities, 37 per cent fixed income and three per cent cash. (A balanced investor seeks a balance between growth, income and capital preservation.)

In view of the deteriorating global economic outlook, such investors may want to consider shifting their allocation to 55 per cent equities, 40 per cent fixed income and five per cent cash.

Reduce equity, increase fixed-income holdings

The decrease in our equity allocation reflects an increased chance, but not a high probability of, a recession occurring in the short term. Our 55-per-cent equity allocation, therefore, reflects a more neutral outlook for stocks. Nonetheless, we continue to believe stocks will outperform bonds over the long term. So you should still hold more stocks than bonds in your portfolio.

Our fixed-income allocation increases to 40 per cent from 37 per cent. Holding a higher proportion in fixed income will likely provide greater portfolio stability in the event of a sizable equity market setback. That said, we’re not enthusiastic about government bonds now because we consider them overvalued. Better to focus on GICs and good-quality corporate bonds that provide you a positive real return.

Increase cash allocation

We’ve increased our recommended cash allocation to five per cent from three per cent. A higher cash component will not simply act as a portfolio stabilizer but as a source of buying power in the event of a pullback in the stock market.

Some investors maintain a consistent asset allocation during all types of markets. And that’s fine if you don’t mind the volatility that accompanies stock market corrections and economic downturns.

But if your investment time horizon is shortening, or you don’t like volatility, you might want to consider a change in your asset allocation to reflect the riskier outlook for equities.

This is an edited version of an article that was originally published for subscribers in the October 18, 2019, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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