Personal Finance Part 3, Portfolio Allocations.




The final portion I am going to cover is portfolio allocation, or the ratio of stocks to bonds. Many of the opinions I express here are of personal opinion and are not derived from any particular source, just bits and pieces combined together that I have taken a liking to over time.


First off, my personal equity to bond ratio is a 90/10 split. The majority of my equity is in low cost index funds (about 70%) with the remaining 20% in single stocks that I believe have upside potential in the future. Logic has it that the entire equity portion should be in low cost index funds (as almost no one beats the index), but individual stocks can have higher dividend yields and of course, zero fees. I always abide by the Graham number when purchasing single stock positions and combine it with my personal economic outlook for the future of said companies. Treasury stock on a company’s balance sheet is also very important to me (and Warren Buffett), as stock buy backs increase an investors total equity in a company over time, and even more so when you buy a stock at a down trodden price and the buybacks represent larger multiples of shares for the company buying them back. This indicates a sane company with the investor’s best interest in mind.


My 10% fixed income portion is a mixed bag. Half treasuries and half corporate preferred. Corporate preferred were definitely a favorite of Buffett back in the 80-90s, but obviously carry a higher risk than US government obligations, and with that risk carry a higher yield. The other unique thing about most corporate preferred that corporate bonds do not carry is the fact that most of the issues are open ended, meaning you can reinvest your dividends and allow them to compound. My favorite issue of all is the General Electric Baby Bond, or GEB shares. They yield about 5%, can be purchased at the same price per share as most preferred ($25), carry a senior debt obligation and are open ended, meaning you can compound the bonds.


Being able to liquidate fixed income securities in shares equivalent to $25 a piece also gives an investor more flexibility in reallocating their portfolios. Most treasuries have a minimum amount on the amount that can be liquidated depending on the bond market demand and corporate bonds usually have to be sold and bought in multiples of $1000.00. Don’t even get me started on the illiquidity of municipal bonds for the average investor.


And liquidity in fixed income is valuable to me. When the stock markets tanks and then the value of my equities dips below 90%, I sell a proportionate amount of bonds to purchase stocks. So if a bad day pushes equity down to 85% and fixed up to 15%, I sell off 5% of fixed and buy equities with that. I typically don’t function the other way around. Simply put, if the market keeps rising and pushing up the equity ratio, I just don’t buy stocks and only buy fixed. This keeps me sane and grounded and it’s a great way of keeping track of market jubilance.


I will be producing more of these in the future, please feel free to leave your personal strategy below!

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