Saturday, July 02, 2005

Asset allocation

Maximizing returns and minimizing your risks is the magic to achieving your investment goals and getting a good night's sleep. You can achieve these seemingly opposed aims by distributing you investments in different assets this is asset allocation.

According to studies by Nobel laureate William Sharpe and researchers like Brinson, Hood and Beebower (1986), asset allocation accounts for more than 95% of all variance in quarterly returns. (for purposes of this discussion I will restrict myself to non real estate assets). Using Ibbotson's data from the past 70 years on expected returns and standard deviations (geek speak for reward and risk), I ran some excel magic and came up with what I think is an ideal asset allocation for your non real estate investments.

If you are a US resident below 35 years of age

US bonds 15%
US Large caps 25%
US Mid Cap 15%
US Small cap 10%
International 25%
Commodities 5%
REIT’s 5%

Of course do not forget to keep 4-6 months of expenses in liquid cash for emergencies. As you age you want to reduce your exposure to stocks and increase exposure to bonds.

soundmoneyfuture@gmail.com

23 Comments:

Anonymous Anonymous said...

Why did NitroMed (NTMD) only increase 13% on news that it would begin sales of its drug BilDil by 7 July? Based on the market for Nitric Oxide drugs BilDil should bring sales of $220 million by 4Q 2005 and $550M by 3Q 2006. That would put NTMD's book value at $42/share. It is currently priced at $22/sh. Why is there such an unvaluation of this stock. Is it still undiscovered?

3:39 PM  
Anonymous Anonymous said...

Very nice post. A few comments based on my minimal research/reading: There's no such thing as an "ideal" asset allocation - different people have different needs. Furthermore, the location of funds (taxable versus tax-exempt accounts) determines your asset allocation almost as much as risk/return factors. For instance, if you don't have space or tools in a tax-exempt account for REITS, it's almost not worth having them (depending on other factors ofcourse). Thus it is a highly personalized thing, this asset allocation thing.

Also, it has been shown that for purposes of asset correlation and risk/return - midcap is not worth holding at all. The returns aren't as good as small cap and the risk is way more than large cap. Better diversification is afforded by overweighting value versus blend (you want to eschew "growth" as an asset class since "blend" is often mostly growth due to cap weighting). "Value" has over the long run beaten growth and punched small holes in the efficient market hypothesis (read Robert Haugen, for instance). It seems paradoxically, in the long run, good companies are bad stocks and bad companies are good stocks. So, then, using the same model as yours, but taking value stocks into account, the following would have a better return/risk characteristic for someone just starting out:

US bonds 15%
US large market 15%
US large value 10%
US small market 10%
US small value 10%
International market 15%
International value 10%
REITS 10%
Commodities 5%

These should ideally be implemented using low cost index funds that are appropriately tax-managed if held in taxable accounts. There aren't any great low cost commodities index funds so you may want to wait a while before giving commodities weightage considering how incredibly speculative that market is.

-kurra

11:09 AM  
Blogger JLP said...

Looks like ya got yerself a spammer! He's been on my blog too.

7:28 PM  
Blogger mia said...

I give your blog an A+ with a Gold Star! I really enjoy your content and will be back very frequently! I enjoyed the information you had on commodity brokers as well. I actually have an commodity brokers blog with all kinds of cool things in it. May I put a link to this blog of yours on mine?

4:37 PM  
Blogger Get-A-Free-House said...

Build a custom home for a discount of 42% up to 100%.

The ONLY Website in the World That Teaches You How to Order Your Brand-New, Custom-Built Dream House, And Pay An Average 42% LESS Than You Could Sell It For On The Market.

Click Here For More Information


Mortgage Note
Mortgage Note
Mortgage Note
Mortgage Note
Mortgage Note
Mortgage Note
Mortgage Note
Mortgage Note
Mortgage Note
Mortgage Note

5:24 AM  
Blogger The Answer Man said...

If You Or Someone You Know Wants To Buy A House, Don't Let This Pass You By Without At Least Taking A Look.

Click Here For More Information



real estate
real estate
real estate
real estate
real estate
real estate
real estate
real estate
real estate
real estate

8:40 AM  
Blogger FXGUY said...

Good job - interesting posts, lots to consider. My own interests concern our forex and perhaps you might have an interest in checking out the subject of our forex. Keep posting and I'll keep reading.

12:19 PM  
Blogger Bill888 said...

Wow what a great blog. You've piqued my interest.. The forex market is also one of my interests along with forex calculator. Thanks for the info.

1:23 PM  
Blogger Free Traffic System said...

Hello,

I liked your blog. I found many interesting information here.
I also give free info about automated forex forex forextraderguide.info guide on my
href="http://www.WebTradingSystem.com">Forex Trading System
site.

If you have time please visit my web site to get some free automated forex forex forextraderguide.info guide
information.

Kind regards,
Nick

7:32 PM  
Blogger Free Traffic System said...

Hello,

I liked your blog. I found many interesting information here.
I also give free info about forex forex forex forex forex forextraderguide.info guide guide on my
href="http://www.WebTradingSystem.com">Forex Trading System
site.

If you have time please visit my web site to get some free forex forex forex forex forex forextraderguide.info guide guide
information.

Kind regards,
Nick

10:29 PM  
Blogger De Post Man said...

Informative post. Take a look at my credit site ( http://mortgage.27days27gurus.com/ ) f you can. Thanks credit union

3:57 PM  
Anonymous Anonymous said...

I'm always looking for a place where I can learn more about forex, forex trading, forex trade and improve my online profit. I will be keeping an eye on your blog as I liked it a lot. Another site I found with forex trade resources is forex trade

7:39 AM  
Blogger . said...

I just came across your blog, and wanted to drop you a note telling you how impressed I was with the information you have posted here. I also have a forex trading free commission blog, so I know what I'm talking about when I say your site is top-notch! Keep up the great work, you are providing a great resource on the Internet here!

12:21 PM  
Blogger . said...

I just came across your blog, and wanted to drop you a note telling you how impressed I was with the information you have posted here. I also have a forex charting software blog, so I know what I'm talking about when I say your site is top-notch! Keep up the great work, you are providing a great resource on the Internet here!

5:34 AM  
Anonymous Anonymous said...

Hi,

Just browsing around the net for forex trading signal and came across your blog. I've been trying to add as much info as I can about forex trading signal on my site. But must admit I get a bit confused... there's just some many sites, tips, information ... you name about forex trading signal it's hard to know where to begin!
I'm thinking of adding a forex trading signal on my site, when I do, your all more that welcome to come a leave tips and help...

Until then take care!
Steward.

1:42 PM  
Blogger HFUNDATION said...

I with no reasonable doubt say that the info you provided above was right to the point as we all know it forex secret can be very challenging and thus we should applaus to those that put in wore to provide us with all needed ideals and infomation. My self i`m very thankfull. You can get more ideals and info from my website forex secret

6:31 PM  
Blogger doer said...

Hey, you have a great blog here! I'm definitely going to bookmark you!
I have a forex system site. It pretty much covers Forex related stuff.

12:57 PM  
Anonymous Anonymous said...

Hey, you have a great blog here! I'm definitely going to bookmark you!

I have a http://www.start-job.com/s-chef apron
.html site/blog. It pretty much covers chef apron
related stuff.
http://www.start-job.com/s-chef apron
.html chef apron


http://www.start-job.com/n-chef apron
.html News chef apron

Come and check it out if you get time :-)

12:08 AM  
Anonymous Anonymous said...

putting to waste some good money that could have been used in other areas of development for the business involved.

11:46 PM  
Anonymous Anonymous said...

Hi, I was just blog surfing and found you!

I have a mortgage-refinance-info site/blog. It pretty much covers mortgage and refinancing related stuff.

Come and check it out if you get time :-)

1:50 PM  
Blogger Bob said...

Check uot this site if you are thinking of futures trading

12:50 PM  
Blogger job opportunitya said...

Terrific blog. I search the internet everytime I
get a moment to find blogs. Its better than cold iced
tea and I have to visit it one more time!
Check out my blog, please!

5:07 PM  
Anonymous scottaedwards said...

Here it is... FREE advertising, FREE download. No cost to you! Get your FREE download NOW! Make money and get FREE advertising! This is a great program for the new year... Check this out now for FREE!

To find out more visit: hi-tech site. It successfully exposes FREE information covering traffic and hi-tech related stuff. Don't forget, FREE, FREE, FREE!!!

9:06 AM  

Post a Comment

<< Home