In an effort to manage a portfolio's risk, diversification and the equity/bond allocation is often mentioned a

Question

In an effort to manage a portfolio's risk, diversification and the equity/bond allocation is often mentioned and given a lot of weight. With bond yields relatively low, has anyone discussed allocating the equity portion to income equities and non=income equities. In this manner we could compare a portfolio with a 60% equity/ 40% bond with another portfolio in which we would have a 75% equity / 25% bond BUT the 75% equity is subdivided into 40% income equity / 35% non-income equity?

Answer 1

All stocks do not have the same risk. So, when a certain amount is allocated to equity, is does not automatically correspond to a mandated level of risk. As you mentioned, choosing income equities over others changes the dynamics of risk level of the portfolio. However, there are other implications too, like taxes. Income trusts (and I think that's what you refer to when you say Income stocks) are subject to higher tax rates. So, you need to consider the income bracket of the investor.

Similarly, if the person is in capital preservation mode, then bonds will occupy a greater portion of the portfolio. This is because most equities (even income trusts) carry more risk (default risk, among others) than bonds.

So, remember there are no strict mandates for percentage allocation, just guidelines. When matters is the getting the risk exposure correct. Theoretically you could choose an all equity portfolio (not recommended) that would be less risky than an all bond portfolio.

I hope this helps..

Answer 2

Buying into income equities ( dividend paying stocks ) is the basis for many, many long-term, cautious investors. Rock solid plan . As for comparisons...it would only be for your personal info...no matter what you show, some people just like the higher returns ( even with the risk) of smaller " growth" stocks.  ( ...and some are lucky enough to make returns that " justify " the risk )