Evidence of the benefits of diversification

Modern portfolio theory. Lets look at the risk and return figures for 3 asset allocations since 1972. 1. 100% S&P 500 2. 60% S&P500 & 40% 10 Year US Govt Bonds 3. 20% S&P500, 20% Foreign Stocks (MSCI EAFE), 20% 10-Yr US Govt Bonds, 20% REITs, & 20% Commodities (GSCI) (AA is #3, the asset allocation portfolio). All figures are total return data,...

Sample Portfolios Beginning 12/31/2006

These portfolios by no means attempt to find the ideal asset allocation for everyone. Depending on your financial situation, the weightings of the assets could be very different. I am simply using these as a standard in order to compare the alternative portfolios.World Beta 5 Asset Class Portfolio25% US Stocks (VTI)25% Foreign Stocks (EFA)30% US Bonds (AGG)10% Real Estate...

Improvements to Standard Asset Allocation

The academic literature has found a number of adjustments an investor can make to improve upon the typical standard US Stocks & US Bonds allocation. In no particular order they are:1. Tilt the portfolio to value. (And tilt toward fundamental weightings)2. Tilt the portfolio to smaller companies.3. Add foreign and emerging equities.4. Add various types of bonds, ie TIPS,...

Diversification & Tracking Portfolios Beginning 12/31/2006

True diversification means moving outside of the typical US Equities and US Bonds to other asset classes. A simple 5 asset class portfolio could consist of :US Stocks (VTI)Foreign Stocks (EFA)US Bonds (AGG)REITs (IYR)Commodities (GSP)An investor looking to add more asset classes could easily approach 15-20 worldwide betas. In this blog, starting Dec 31, 2006 I will track a...

Risk Parity

Let's take a look at a way to practically implement risk-parity in a portfolio. A traditional 60/40 mix of stocks and bonds can be leveraged one of three ways. First, through a traditional margin account with the investor being charged the broker call rate + or - an amount relative to their account size. Currently the rate at Fidelity...

Intro Reading

Three white papers by Bridgewater and PanAgora to introduce the blog and the topics of post modern portfolio theory and risk-parity... "Engineering Targeted Returns and Risks" - Bwater "The Biggest Mistake In Investing" - Bwater "Risk Parity Portfolios" - PanAgora