In my last post on the topic, I wrote about my current asset allocation and ways I might tweak it. In this post, we'll look at the specific tweaks I'm considering.
The first and most obvious way would be to adjust the allocations, which is what I'm looking at doing now. I'm very heavily weighted toward US small cap equities at the moment, and that is intentional. However, I think I can probably increase my allocation to US large caps to 10% (split between 2 funds) of the total and scale back the exposure to international mid cap equities a bit. I'm thinking of reducing my total international mid cap exposure to 15% total, or 7.5% per fund (currently). I effectively have no commodity exposure now, so that needs to change to the tune of about 5%. The real estate exposure could probably be bumped up more (currently 4%), but I need to increase the foreign real estate exposure and decrease reliance on the US. I think 2.5% US/2.5% foreign real estate makes sense for now. The US fixed income allocation will drop to 7.5% from 8% and the international/emerging market fixed income will drop to 5% from 6.25%.
I've already described my current allocations, so by making the above changes I get this:
20% US small cap equities
15% International mid cap equities
10% US large cap equities
10% International small cap equities
7.5% US Fixed Income (FI)
6% International large cap equities
6% Emerging market (mkt) equities
5% International & emerging mkt FI
5% US TIPS
2.5% US real estate
2.5% Foreign real estate
As it stands, I have 3.5% to re-allocate. Considering that my outlook is lots of inflation and better foreign and emerging market performance than US market performance in the longer term, I think I'll weight most of that toward increased emerging market equity and commodities. With rising rates (to combat inflation), as well as just having some "dry powder", I'll increase the cash allocation as well, but only by a small amount.
I plan to get the commodity exposure outside of funds, either using ETFs or direct investment in the metals. No more futures or options on futures for me, at least not anytime soon!
So, the final changes to the above asset allocation become:
7% Emerging market equities
2% Cash (brokerage account)
Now, some of this will be easier because Merrill Lynch, home of my oldest 401(k), informed me that they have an agreement with my employer to roll those accounts into the new 401(k) plan at Fidelity. (
Secondly, I plan to sell the oldest 100 shares of SPXJX in my portfolio. SPXJX is a Japanese value fund and makes up almost half of the international mid cap equity allocation. I don't see that allocation changing dramatically anyway, but I'd still prefer to have a little more cash on hand. SPXJX has had a nice little run, and I'll get dinged for long term capital gains on it. Not a problem. I want to avoid a loss; it really is about capital preservation.
The next way I've been considering juicing my returns is to engage in some covered call writing, as James Stewart of SmartMoney.com and the WSJ has spoken of doing. (Argh! This is what I get for being lazy on completing that damn options application!) While this isn't strictly a diversification strategy, it serves the same purpose - reducing risk while capturing return. I think I'll write more about my ideas in this regard next time....