How Did I Determine My Asset Allocation Model?

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Determining an asset allocation model you can stick to provides discipline, preventing you as an investor from getting too cute or risky.  This discipline is also very liberating as you are freed up to think about other things and can look forward to investing when it is time to add more funds and rebalance.

How Do I Know What’s Right For Me?

First of all, I find it very important and worthwhile to immerse myself in reading voraciously about the topic.  Books, articles, some which are good, some not so much, but they all contribute to the knowledge and painting in my mind.  Eventually, after much reading, thought and consideration, I’ve come to a conclusion that works for me.  I’ll simply explain why and provide what I think is a great tool to test out your own theories.

My Allocation Model (for now)

Very simple.  50 percent stocks, 50 percent long term US Treasury bonds.  Again, very simple.  Ray Dalio thinks I’m too risky, but for me I’m just right.

Was this the first allocation model I settled on?  Nope!  I believe that is important because it is important we stay flexible, as with all things in life, so we can adapt and improve as our knowledge and experience improves.  I should be stronger, wiser and brighter by the time you are reading this blog versus the time I wrote it.  That’s how I know I am staying flexible enough to grow, but that’s a story for another day.

My Old Allocation Model

My previous allocation model, which I still believe is a good one, is the model revealed by Ray Dalio to be the model he and his team discovered to be the best performing model in terms of risk aversion:

40 percent long term US Treasury bonds

30 percent stocks

15 percent intermediate term US Treasury bonds

7.5 percent commodities

7.5 percent gold.

It was said that this allocation model, back tested to just after the Great Depression, yielded about 10 percent per year (with dividend reinvestment) with a worst year performance of about 3.5 percent down.  If you are retired and living off dividends, the prospect of such a risk-free model is a great idea!  I may even reconsider it when I am financially independent to really put the kibosh on down years.

Why I Changed My Model

After a bit of time, I decided to tweak the numbers and see if I could accomplish a couple of goals: increase growth and dividend payout while keeping risk low.

Through another great early retirement/financial independence blog I came across,, I learned about a wonderful, free online calculator that gives everyone the chance to test different allocation models:  This website has been a great gift to me and I am very appreciative of the folks who made it available to us.

Using this calculator I was able to stack my original allocation model against any number of combinations I came up with.  By testing the original model against my current model, I was able to see that over time in the past, my new model grew at a much greater rate and still managed to keep drawbacks to levels I was comfortable with.  For comparisons sake, the worst calendar year (going back to 1978) this model had was 7.25 percent down, while the large cap stock market dropped by 37 percent that same year.  Not too shabby of a hedge, if I do say so myself.

My Conclusion

For me, this checked all the boxes.  Increased growth, minimized risk (according to my risk tolerance), all dividend paying stocks (I invest in low-cost ETFs that track the S&P 500 and long term treasuries) and, one of my very favorite things – SIMPLICITY!  Not that holding five ETFs is particularly complicated, but if I can get what I need and more out of just two, I’ll take it.

Now, could this change in the future?  Absolutely.  I will not give up on flexibility.  I might get enticed by REITs and their higher dividend payouts or something else.  With the great tools we have at our disposal, I can feel much more confident in my choices, especially not being an expert stock picker myself.  But for now, I am thrilled with this plan and look forward to pouring in as much of my savings as I am safely able to and see how it grows.

Recommended Reading

    *As always, this article is not meant to give financial advice. Past results are not a guarantee of future returns. Everyone must do their own due diligence and determine the money managing and wealth building strategies that work best for them. Information provided here is meant to provoke thoughts, not provide recommendations. This is not personal legal or investment advice and may not be appropriate for all readers. If personal advice is needed, readers should seek the services of a qualified legal, investment or tax professional.

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