2 Asset Allocation Strategies

[BryanMM]

Here are 2 suggested asset allocation strategies (from an American investment journal):

1. 14.3% of assets in each of the following classes:

· Large US cap shares

· Small US cap shares

· Non-US developed shares

· Real estate

· Commodities

· Bonds

· Cash

This allocation, compared with 5 alternatives, resulted in the 2nd best on rate of return (9.75% annual return over 47 years v 10.31% for 100% US stock) and had much lower volatility than the 100% US stock allocation (its worst 3 years was -13% versus -38% for 100% US stock).

Source: Craig L. Israelsen, Asset Allocation, RMDs and Portfolio Survival, AAII Journal, April 2017

2. An alternative strategy:

Allocation evenly among

· US large cap blend

· US large cap value

· US small cap blend

· US small cap value

· US reits

· International large-cap blend

· International large-cap value

· International small-cap blend

· International small-cap value

· Emerging Markets value

From 1970 – 2016 this would have returned 11.3% annually (assuming a 1% management fee). See recommended funds at Paul Merriman's website, click on ‘Recommendations’, click on ‘Best-in-class Recommended Portfolios.’

Source: Paul Merriman, Power Your Portfolio with Value, AAII Journal, June 2017

Both of these strategies are aimed at the US investor. Comments on advisable adaptations for Irish investors welcome.

This post is not investment advice, the author claims no expertise, professional advice should be sought in all cases.

 

[PMU]

The first strategy is to invest in domestic equities; foreign developed market equities; property; commodities; bonds and cash. The second strategy is to invest in domestic equities; property; foreign developed market equities and emerging market equities.
You are correct to state that the first strategy would have a lower volatility – this is because it has allocations to various non-equity and non-correlated assets. It would be interesting to see what is the volatility of the second strategy. I'd guess it's higher than the first, as it is, in effect, an all equity (except for property) strategy.
If you go for equal allocations to each asset class, which both strategies appear to recommend, you, or more correctly the developers of these strategies, are basically saying that the efficient frontier, i.e. the combination of assets that gives you the maximum return for a certain level of risk, is a load of codology. If this were the case, an investor would go for the second strategy as he/she would appear to be unperturbed by risk. However, if you are risk adverse, as rational investors are assumed to be, you would go for the first and in addition to equities, allocate to non-equity asset classes that are not perfectly correlated with equities.