Goal: To develop a portfolio with a balanced risk approach and rebalance once per year-ish. Bonds,Equity's,Gold,Commodity's. Via Low Cost index's and etf's from Vanguard for example.

Economic Seasons.

- Inflation
- Deflation
-High Economic Growth
- Low Economic Growth

If these four generality's are what we can get hit by how do I allocate a portfolio. I am 25 and know there will be a day of reckoning for each asset class so therefore why I need to allocate with a balanced risk approach.

Equitys %?
Bonds %?
Gold % ?
Commodities %?

sounds like you may be interested in the permanent portfolio, which recommends a four-way equal split between equity, long-term bonds, T-bills, and gold

that's not really my cup of tea. my allocation is pretty simple: 60% equity, 40% bonds, with part of the bond allocation in inflation indexed assets

something along the lines of that...

The outcome I want is risk balance, not a general equal allocation. How do I determine level of risk of stocks vs bonds, one obviously has higher risk, should't my portfolio be weighted more to the less risky class?

Say for example Stocks are 5 times the level of risk of bonds, I cant go get 50% 50% bonds.

A portfolio I re adjust once per year and add systematic.

Absolutely not. You need to start from the beginning and study portfolio analysis and diversification.

I'd watch this lecture from Yale's Financial Markets course. Watching the entire series wouldn't hurt, either.

https://www.youtube.com/watch?v=_B_24GUWdSM

100% cash is the least risky/best return for the next five years.
Then into bonds or CDs, or stocks if they majorly correct and interest rates aren't high/likely to go higher.

Diversification is nonsense in the long run, at least using only the items you've got listed. 100% equities is the best diversification strategy around. Lowest risk, highest return. Diversification of the kind you're doing only makes sense in the short run. It's a way to smooth out the short term variance at the (incredibly high) cost of lower long term return. And even then it only works if conditions are right. They're not right at the moment. The items you list are quite correlated under certain events, and diversification will hamper your return while increasing your risk. It's really dumb to diversify right now for its own sake. You have to think about what you're trying to achieve, and balancing between those assets classes isn't going to achieve what you think it is.

Bonds are a bad buy right now (zero rates). Equities are a bad buy (high value, inflated earnings expectations, very long runup, zero rates). CDs are a bad buy. This is a "have cash, wait on the sidelines" market. People rarely factor in the returns of having cash to buy bonds/stocks when they are cheap. But that's the point of cash, and it has the best return of any asset class in some conditions.

I respect your opinion more than almost anyone's on BFS tooth, so to me this is an eyebrow-raisingly bearish statement. By equities, do you mean buying and holding the indexes? Surely a deep value approach should do better than cash, say holding 5-6 very good names? Or are you negative all the way through?

It's not bearish. He wants to minimize risk vs possible return. That's the whole point of diversification. The best way to do that in the current environment - crappy bond returns due to low interest rates, stocks run up for five years straight due to low interest rates and economic recovery - is to be in cash. You diversify into bonds when they're giving you 5+%. 1% returns are nuts. High short/medium term downside risk, 1% return is very stupid thing to buy. Especially when you can have cash with 0% downside risk, 100% instant liquidity, and 0.5% return (and moving up if interest rates go up, unlike bonds, which will move down). I mean, which product is better to hold??

As for equities, I don't know where they are going. I'm not particularly bearish, but they've run up a huge amount, have increasingly high earnings estimates (misses of which will send them down), and have benefited hugely from a 0% interest rate environment and QE. That means you're sitting on substantial risk if you buy equities, and the potential reward is a lot lower than it would be under different conditions.

A deep value approach would likely work. But I think OP is looking for a wider diversification than that, which is why I have the advice about cash.

That's not bad at all, particularly the last bit. But why is it superior to 100% equities? Or 25% gold?

Diversification is about paying for insurance (otherwise, you'd just buy equities since they are highly superior investments long term investments to anything). With the above, you cover 40% of prolonged stock market decline and high inflation that doesn't cause US default.

I mean, it's not bad, but there's a bunch of non trivial events you haven't covered. And if the point of diversification is to keep you in wealth no matter what, you're failing at that goal.

The only way to properly diversify is to write out all risks to your wealth, and cover them using whatever assets classes are needed. Otherwise you're covering for a just a percentage of outcomes. I think you'd be amazed how probable some risks to your wealth are that you haven't even considered.

Risk isn't some general thing that always stays the same. It varies, and no one really knows what it is. For example, right now, bonds are high risk, low return, and you'd have to be nuts to diversify into bonds. Similarly, gold at its historical lows/levels is probably a great buy. Close to historical high, it's very high risk.

There's no formula to work out risk. Which is the why article linked by econophile just says "I give up, let's put 25% in each!!!". You won't find a more intelligent general approach than that, because there isn't one. It a question of:

- How much wealth do I want to save in each scenario that's a risk to my wealth?
- What long term cost am I willing to pay?

That balance is up to you. For example, if I had $100 million, 5% in gold, 15% in bonds, 5% in various foreign currencies. 5% in cash and 70% in stocks would make a lot of sense. If I had $100K, and earn $50K/year, 300% long equities (in a favorable environment) is by far the best play.

It's all about how much money matters to you and how much you want to be covered for in tail events. When you're somewhat poor, the long term return of leveraged equities far outweighs all other considerations. When you're really poor/just starting out, the long term return of getting job skills far outweighs all other considerations. So it depends entirely on what you want to happen.

When it comes to diversification, there are only three avoidable, costly mistakes you can make. Buying at heavily inflated/high risk prices. Not having liquidity when you the **** hits the fan. And putting money long term into non productive assets (i.e. gold).

It only makes sense for him to have a huge cash position IF he pulls the trigger and load up assets when the market crashes. That's a massive if though. It's also difficult to catch a falling knife.

For most people, depending on how conservative/aggressive they want to be, I'd stick with S&P 500, short-term government bonds, cash, and 5-10% commodities/REITs.

By definition a 5 year UST note will outperform your silly suggestion

My more detailed allocation is approximately:

• 60% equity

• 36% total U.S. stock market
• 24% total international stock market
• 40% bonds

• 30% U.S. bond funds
• 5% I-bonds & TIPS
• 5% 5-year CD (I know this is not really a bond)

Why is this better than 100% equity? Partly my risk preferences, partly the historical negative correlation between bonds and stocks, and partly the inflation protection-component of some of the bonds.

Why is this better than 25% gold? I think gold is more hassle than it is worth. If you really want end-of-the-world protection, then you need to own physical gold. But then you're incurring additional costs to protect against what I view as a very low probability event (with there still being end-of-world events that are not covered by a hoard of gold).

Right now, my most important asset is my earning power. I've insured that through long-term disability insurance and life insurance (for my family). I still need to get around to buying a decent umbrella insurance policy, which protects against other kinds of wealth destroying events that are more likely than U.S. economic collapse.

As for U.S. default/economic collapse, I think both of those are very low probability in my lifetime and also difficult to insure against. What other types of risks are you worried about? (Lately I've been thinking more about hacking and identify theft risks.)

The past does not equal the future but what you could do is look at historical data and what sorts of volatility is experienced by holding what proportion of stocks compared to bonds. Once you have established your aa you really need to focus on not ever deviating from your strategy by market timing or letting markets levels determine when you invest. If you simply buy and hold and invest in a low cost index fund (I recommend through Vanguard) you will do well over time.

I would also suggest that you look at Vanguard Retirement Funds. They start off with what aa you choose and then gets more conservative as you get older by adding more bonds. This will make you avoid temptation of when you believe the market is low or high and thus influence your behaviour. Instead you will just keep investing and take what the market gives you over time. You will do MUCH better than most this way.

Thank you for all your responses.

At 45.20 (time) it gets interesting, showing the hyperbola and plotting the tangent...you recommend doing this? If so, Hyperbolas or GTFO.


I sit on sideline waiting for what.... stocks to make a 20%?

what environment are we in and what season do you think is coming?

I'm not sure what puts the biggest risk to my wealth other then not diversifying property. I think the environment is going one way and he goes another. What are the biggest risks for someone with I have 5k in a REIT from an old job just sitting there, 5k in enbridge stock, silver ETF,Transcanada stock, and 10k in cash and an investment property 3 units.

Harry Markowitz can measure it. Right?

Ok, so you would have those vehicles, but is it not way more important to know how much of each then anything?

Thats your allocation, would you enter the market today with that allocation?

Please explain how you would do this.

Even though gold is generally a bad investment, it is still a great diversifier and someone who is interested in minimizing risk needs to hold some gold due to it's negative correlation to stocks and bonds. 25% is way too much though.

*std historical returns disclaimer
Check out this link:
http://b it.ly/1AXaELB

Just adding a little bit of gold to your asset allocation improves returns a little and decreases risk as defined by Sharpe or Sortino.

OP,
What types of risk are you interested in minimizing? That can mean a lot of things. Generally when talking about portfolio construction, risk is compared using Sharpe or Sortino ratios. As LondonJimmy suggested, you can import the historical returns for asset classes you are interested in and then use Excel solver to maximize Sortino ratio. That would give you a decent allocation.

Also Toothsayer is wrong a lot in this thread.

has he ever shared his other accounts here?

This isn't true, or, at a minimum, is not as true/simple as you appear to be making it out to be. Many think gold is a solid hedge against a falling stock market, but that is not necessarily true.

One reason why is that very often when the stock market goes down, interest rates go down, inflation is reduced, and the dollar gets stronger, leading to downward pressure on gold (assuming you're buying it priced in dollars). Depending on why the stock market is going down, this may lead to gold decreasing along with the stock market.

You are correct that in some cases, such as a stock market dip triggered by geopolitical issues, gold will increase while the stock market decreases. However, to say "buy some gold to protect against stocks/bonds going down" is, in my opinion, poor advice. That may not have been what you meant, but that's how I interpreted what you said, and I'm sure many others did as well.

And no, I didn't click your link. If you think your link refutes what I said, then feel free to explain what you think your source is saying.

I want to balance my risk , I'm not sure how to answer that.

Are you able to show example of this

Sounds like you want a "risk parity" portfolio. AQR and Bridgewater are pretty much the leading hedge funds doing it. In short, the allocation is done such that risk exposure is approximately the same across each asset class. So riskier assets like stocks get a smaller allocation. Safer assets like US govt bonds gets a bigger allocation.

You might end up with a portfolio like this..

30% stocks
80% government bonds
30% TIPS
15% commodities
5% emerging market currencies

If you know how to get the leveraged exposure using futures, you can even do it yourself without paying the management fees.

I misspoke when I said "negatively correlated". What I was trying to say is that any asset class which has positive returns which are very uncorrelated to the rest of the portfolio has some great diversification benefits. Gold as an asset class fits those characteristics.
The link I posted is a portfolio backtester. I plugged in econophile's portfolio in one test and econophiles portfolio with a little gold added for another test. Adding the gold increased returns and decreased volatility for the past 40 years.
I'm not advocating buying gold because the world is going to end. I am advocating it's diversification benefits when added to a portfolio. Using a little gold helps increase Sharpe ratios.
I got the idea from this NYT article. Mankiw is an academic who begins discussing the topic as a skeptic.
http://www.nytimes.com/2013/07/28/bu...gold.html?_r=0

I don't know how to use Excel solver. I wrote a python monte carlo simulation to do pretty much the same thing. Drawbacks of solver are that it can take a long time to run with just a few variables.

Check out the website:
https://www.portfoliovisualizer.com/
and try out some different combinations. The type of risk I want to minimize in a portfolio is drawdowns. Because of that when comparing two different portfolios, I compare their Sortino ratios. There may be better ways to do this, but this is what works for me.

This is awful advice imo. You are encouraging him to put his money in to an asset class that wont even keep pace with inflation. On top of that, nobody knows when the right time to re-enter the market is and the average retail stock picker sucks at timing the market. OP, If you are 25, you should be very comfortable with a 70/25/5 allocation because of time horizon. Maybe a 65/25/10 if you want to be a little more conservative.

In what world is cash better than CDs for least risky/best return?

go on

Serious question. Why do you have gold as an investment asset class? Same q about commodities?