Viewing My Sector and Asset Allocation

As part of my portfolio management processes, I have a behemoth spreadsheet that I use that includes all the data on my portfolio, including dividends per year, portfolio values, and investment returns. In addition to these normal portfolio management tools, I have two charts that I use to monitor a couple of very important aspects of my portfolio. These charts give me real time views of my portfolio structure. They include both asset allocation and sector allocation.

Let’s deal with the more important of the two in my opinion. Asset allocation is one of the most important investment decisions that an investor can make. In fact, asset allocation determines more of your returns than any other aspect of portfolio management. Take a look at the image below, from the book The Only Three Questions That Count:

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As you can see, 70% of an individual investors returns are determined by the asset allocation that the investor keeps. Actual security selection accounts for only 10% of those returns. Of course, this assumes a properly diversified portfolio with a number of stocks (or index funds). However, the message is clear – asset allocation is crucial.

Here is how I view my asset allocation using a chart created in Excel. As you can see, I included both my target asset allocation (what I want to have as an asset allocation) an my actual asset allocation at the time of the portfolio update. Using this chart it becomes very clear what assets I need to focus on.

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The second chart I have in my arsenal is the sector allocation chart. This chart provides me with a snapshot of the various industries I am invested in, as well as the other types of investment products I am using, such as index funds or pension funds. Including these two elements ensures that I get a full picture of my account and not just a subset of it. It is important, for proper diversification, to ensure that an investor is spread out among a number of different sectors in the market. For a long time I was heavily weighted to banks and paid the price. I have recently reduced that exposure and am in a better position now. I have areas that I need to focus on such as tech, but that will occur over time as I add securities to my accounts. Here is how my sector allocation looks as of today:

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These charts are tools I use to manage my portfolio. I think it is important, especially if you are an active investor, to create such tools to help manage your own portfolio. It does not need to be the same. In fact, I am sure there are better ways of doing it. Please let me know what tools you use!

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