When I started the Sleepy Portfolio, I intended to track it as my personal portfolio benchmark and as such the portfolio allocations reflect my personal investment goals and risk tolerance. I am frequently asked how an investor should tailor this model portfolio to suit their investment goals. In this post, I’ll try and answer some of the questions that frequently arise:
Aggressive Asset Allocation
I started the Sleepy Portfolio in my early thirties and allocating 20% to bonds and 5% to cash is not unreasonable for a young investor. In fact, some would consider the allocation too conservative. Older investors can dial up the “sleep-at-night” quotient by increasing the allocation to bonds. Keeping the age in bonds is a good thumb rule to start with. The bond allocation should then be adjusted for the need, capacity and willingness to assume risk.
Too much allocation to Foreign Stocks
Once an investor has decided how much to allocate to fixed income, the next question is how much to allocate to Canadian stocks. The Sleepy Portfolio allocates 28% of the equity portion to Canadian stocks. Some may consider that too much, others too little (See this post on Portfolio Allocation to Canadian Stocks for some interesting comments). Dan Solin, author of The Smartest Investment Book You’ll Ever Read allocates just 10% to Canadian stocks in his model portfolios based on the belief that investors should hold globally diversified portfolios. Others such as money manager Leith Wheeler say that Canadian investors can get most of the global diversification by allocating half their portfolio in foreign stocks. It is clear that adding some foreign stocks to a portfolio reduces overall risk. Exactly how much is a matter of much debate.
Providing a value and small-cap tilt to the portfolio
The Sleepy Portfolio keeps it simple by holding broad-market, capitalization-weighted indices. There is a large body of evidence that show that investors would have earned a premium for holding small-cap stocks and value stocks in the past. Opinions are divided on whether investors should expect the small-cap and value premiums to exist in the future. I chose to keep it simple in my own portfolios but it is not unreasonable to choose to slice-and-dice equity holdings based on size and value.
The bottom line is that while the Sleepy Portfolio is well thought out (even if I say so myself!), there are not many right and wrong answers in investing. Should you allocate 28% or 35% of your equities to Canadian stocks? Pick one and stick to it. It is impossible to say in advance which option would turn out to be the best answer.