Breaking my own asset allocation rules

I have a confession to make. I have broken my own asset allocation rules with my second quarter trades.

I bought more equities even though I was already a bit overweight in them.

Why did I do this?

My reasoning is as follows:

  • I have a relatively low target equity weight to begin with (46% of our portfolio)
  • I had a lot of cash on hand (way over 10% of our portfolio)
  • I have more cash becoming available due to savings, bond maturities, dividends and interest in the next 12 months or less
  • quite a bit of that cash was in our TFSAs and I wanted to get that money working at better than than bond returns since the returns are tax free
  • bond yields are still not that attractive in spite of rising rates (~3.1% yield-to-maturity on a five-year investment grade corporate bond)
  • there are a lot of relatively good deals in consumer staples, utilities and telecommunications right now – several companies are off their highs and are trading at reasonable multiples
  • these three sectors are pretty defensive and could do OK in a recessionary environment
  • I only bought high quality equities with relatively low risk and often decent dividends (with one or two exceptions)
  • I did not add any new positions, just added to our existing holdings to increase their position size to something more in line with our average position size
  • Next quarter is another opportunity to review our portfolio and decide if we should trim some of the big gainers, especially in technology, which are starting to become more dominant single positions in our holdings

What I bought (all in our TFSAs):

  • Algonquin Power (AQN) – initially bought in my Canadian TFSA and journalled to my US TFSA to get the dividend that is paid in US dollars without conversion back to Canadian dollars
  • Bell Canada Enterprises (BCE)
  • Fortis (FTS)
  • Loblaw (L) – has a relatively low dividend
  • ONEX (ONEX) – this is an exception as it is a growth stock with a very small dividend in the multi-sector holdings industry
  • North West Co (NWC)
  • Telus (T)

I also bought some bonds:

  • CALLOWAY-I 3.985% 30MY23
  • FAIRFAX FINL 4.5% 22MR23
  • CANADIAN WESTERN BANK Maturity Jun 16 2022 Coupon 2.737

So, after this investment “spree,” our weightings vs. targets are as follows:

Asset Type Planned Actual Variance
Equities 46.0% 51.9% 5.9%
Bonds 36.0% 29.6% -6.4%
Bullion 9.0% 9.1% 0.1%
Total Cash/Near Cash 9.0% 9.4% 0.4%
TOTAL 100.0% 100.0%

All in all, we’re still in a pretty conservative posture and continue to have flexibility with cash levels if needed.

More to come in early July when I publish my Q2 portfolio review.

Author: Michael

2 thoughts on “Breaking my own asset allocation rules”

  1. Michael,

    I like what you have done with the portfolio. I think you know what i am going to say….. if a little extra equity is good for the portfolio, maybe allot more is even better!

    Effectively I have moved to a full weight position in consumer staples after years of being underweight due to my view that they would be dogs. More recently they as a group have fallen too far against the benchmarks. Do not get me wrong, I still think they are dogs, most likely until the next recession hits which maybe years away. But what if i am wrong about the next recession? If you are playing the long game, then certainly this sector will come back into favor and, if this is true, then we should buy it when its out of favour. Buy low sell high…right? And its defensive…sort of. For you, it has an even greater effect as you are swapping out an underperforming set of asset classes (bonds and cash) for a defensive sector which you are getting at a good price.

    The only thing i would do differently is drop the utilities due to the ever likeliness of increased rates as this asset class, for the most part, behaves like bonds. There is a reason why they have been under pressure for the last year,….all mostly related to rates.

    As for you breaking rules, i feel that this is more like a strategy adjustment. To me rules are more like: never have more than 5 percent in any one stock or never have more than 3 percent in speculative positions, never buy dumb things like crypto currencies etc…. Changing your asset class mix is strategic based on the underlying environment at any one time. You limit yourself if you box yourself into fixed asset mix forever. As smart investors, we need to adapt and take advantage of market conditions. As much as I am all about equities, i have owned bonds during high interest years and did quite well as interest rates fell. Its these strategies that allow me to beat the market most years and for those few years where i am wrong…i lag just by a small amount as i always try to not to be too far out of my benchmark weighting anyway. Eventually I will be wrong about a strategy, so i always try not to beat the market by anymore than i am prepared to lag it (one of my rules but not a strategy).

    Once again, great move.


    1. Thanks for your encouragement Raven. You always seem to offer great insights!

      I am struggling a bit with the buy low, sell high strategy, since it does seem to be a bit like market timing. But on the other hand, buying good companies when their sector is out of favour, and hence their shares are on sale, seems like a good idea. What I didn’t do was any of the sell high part…. Next quarter I really do need to take a close look at the technology sector and my weightings and consider a bit of trimming…..

      With regards to utilities, I do agree they behave a bit like bonds (but pay better yields generally). One of the reasons I added to utilities is that I don’t have much energy exposure and the utilities I have are my proxy. So far I haven’t regretted the decision and I am getting paid to wait for a future rebound.

      I do think my latest moves were more a strategy adjustment. I’ll have to see if it warrants an adjustment to my household investment plan….

      Thanks again for dropping by. And I hope you’re right the next recession is a long way off, but with the prospect of a vicious trade war looming, it is hard to believe one won’t follow in the medium term. But who knows?

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