The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Nov. 4, 1997)

Scroll to the bottom for year-to-date Growth and Value Screen results.

A number of readers have asked recently about the issue of asset allocation, so let me share my thoughts on the topic today. Traditional asset allocation notions break up one's investment dollars into three large classes: equities, bonds, and cash.

As Fools, though, we don't believe in putting one's investment dollars anywhere but in common stocks. I'm not referring to money that should be set aside for emergencies, or money you'll need to rely on in the next five years, but only your long-term investment dollars. Historically, stocks are the best place for long-term growth; why fight the odds?

But when I think of asset allocation within the much narrower focus of stocks alone, I do have some thoughts on how one might go about investing the proceeds within an all-stock portfolio. Tom and David Gardner have set up their eternal Foolish allocation for the Fool Portfolio of approximately 30% Dow stocks, 60% small-cap growth stocks, and 10% short-sales of high flyers, and I won't suggest that it's wrong in the least. I simply prefer a flexible model that adjusts with one's age. And since I personally don't short stocks or invest in small-caps, I've adopted a little different approach to portfolio allocation.

The model I use is very straightforward. Subtract your age from 100 (and round off to the nearest ten, if you like). That number is the percentage of your stock portfolio that you might consider investing in growth-oriented stocks. The remainder would be invested in the more conservative Dow Dividend Approach stocks.

For example, a 30-year-old investor would have the bulk of his portfolio geared towards growth stocks (70%), and only 30% in the Dow stocks. An older investor, say at age 80, would weight the portfolio much more heavily in Dow stocks (80%) and only leave 20% exposed to the more volatile growth choices.

The reasoning behind this is two-fold. First, by always remaining in stocks, you're able to generate portfolio growth indefinitely, even after you retire and begin withdrawing a percentage each year to live on. Portfolio growth is the best inflation hedge, not fixed-income investments. But second, as you age, you typically won't need to be as aggressive and normally wouldn't want to expose your holdings to the same degree of volatility risk that you will when you're young.

So, how would this work for a real portfolio? Let's say you want to hold ten stocks and are 40-years-old. The Dow stocks would represent 40% of your portfolio, so choose four of them, using your favorite Dow strategy. The remaining six positions would be selected using whatever growth approaches you favor, or any combination of approaches you find helpful. A 70-year-old investor might buy seven high-yielding Dow stocks and only three growth stocks. (Or if you prefer fifteen or twenty stocks, and adjust the number of holdings proportionately.)

So for me, asset allocation is really about which strategies I'll favor within my stock portfolio, not which asset classes I'll focus on. Fool on!

Monthly Growth Screens
(Jan. 3 to present)
90.72%  Relative Strength  
33.54%  Investing for Growth  
33.38%  EPS Plus RS  
25.77%  S&P 500 Index  
22.57%  Formula 90  
19.11%  Unemotional Growth  
17.28%  YPEG Potential  
14.14%  Low Price/Sales  

Annual Value Screens
(Jan. 1 to present)
24.22%  Dogs of the Dow  
23.32%  Dow Combo  
23.00%  Beating the S&P  
22.39%  Foolish Four
21.60%  Unemotional Value  
21.60%  Beating the Dow  
19.24%  Dow Jones Ind Avg