A discussion about Asset Allocation

[A HERETIC I AM]

I was thinking that perhaps a thread that discusses Asset Allocation and Sector Weighting concepts might be appropriate for this forum and one of the top results when i Googled "Asset Allocation" was this page from the Securities and Exchange Commission;

http://www.sec.gov/investor/pubs/assetallocation.htm

While pretty basic, it still has some very good information for investors, from the novice to the experienced. About halfway down that page there is a link which takes you to this very interesting calculator;

http://www.ipers.org/sub/calcs/AssetAllocator.html
Adjust the blue sliders to the appropriate points on each scale for age, current assets, savings per year, risk tolerance, etc. and the pie chart changes according to a proposed allocation model. Then click on "view report" to see the results. Pretty neat tool.

Here is a link to a page that has a number of different calculators;

http://www.ipers.org/calculators.htm

including this one which can show you that value over time of using a Roth IRA account vs. a Traditional IRA;

http://www.ipers.org/sub/calcs/RothvsRegular.html

I have learned that for the most part, every properly allocated portfolio will have, to one percentage or another, all of the following asset classes;
1) Cash
2) Equities
3) Bonds or other fixed income instruments
4) Real Estate - either real property or REITs
5) International investments
6) Assorted Non-Correlated Assets.

The first 5 are pretty clear but you may ask "What are 'Assorted Non-Correlated Assets'"?
Assets that would fall into that category can include:
Fine Art
Fine wines
Stamps
Coins
Antiques
Collectible Automobiles
Boats
Planes
Jewelry and unmounted Gems
Precious metal bullion (Gold, Silver, Platinum)

In short, any tangible item of value that in a pinch, could be liquidated.
There are some people out there who have a net worth of $5,000,000 and $4,000,000 of it is in vintage Ferrari's Or Picasso's. I think you might get my point. There are also people out there that have a net worth of $300,000 and $275,000 is in their home.

Regardless of the size of your portfolio, sooner or later it will look something like the above numbered list. If you think of numbers 1 thru 6 as sections of a pie chart, the size of each slice will vary depending on a variety of factors, none of which are either inherently good or bad. It is important, however that there be diversification. The old adage "don't put all your eggs in one basket" most certainly applies. A properly diversified portfolio can weather all economic climates. Even in a down market, people make money.

Research that I have read indicates that the most effective investment portfolios, those that consistently out perform over time, do not depend on any particular asset in a given class but a proper blend that is well managed and diversified.

Example;
Take the guy with all the Ferrari's. If he has all of one model, (A 308 GTS, for example, the one seen in "Magnum PI" and quite frankly, a POS as far as other Ferrari's go) and that model falls in market value then he is screwed. But if he has a '67 Dino, a '97 355, a '79 Boxer Berlinetta.....you see where I am going.

The point is diversification inside asset classes as well as owning as many of the classes as possible.

Does this sound as if it is a discussion that would be of interest to the regulars on this forum?

I suppose I'll know if it gets no responses!

[scruffy]

1. I disagree with your "non-correlated assets"

These tend to be asset classes that move in opposite directions of each other . .. for instance it used to be thought that US stocks and international stocks were negatively correlated to the extent that if US stocks were performing well, international ones would be performing poorly. That correlation isn't as strong as it used to be. Asset classifications that often move in opposite direction are real estate vs the US equities market and often natural resources vs the US equities market.

I would classify your list (Fine Art, Fine wines, etc) more as collectibles, with the exception of gold, which is often negatively correlated with the US equity market.

[A HERETIC I AM]

2. Agreed. Wrong choice of word.

Perhaps "Various, unassigned to a class assets"?

You get where i was going though, right?

I think that section of the pie chart would and could also include such things as commodities and futures, but those sorts of investments tend to be rarely held by the average investor.

But on the other hand, it is quite likely that many collectables are indeed "non correlated" to the market in general. Does the price of a Renoir go down if the stock market is bearish?

[scruffy]

3. Price of a Renoir might go UP if the market is bullish . . .

more people having the $ to purchase it . . . so in that case, there is a positive correlation. If the market is bearish, with people having less cash available, price could indeed go down - again, a positive correlation. I remember the same thing a few years ago with collectible cars . . when the economy was good, the prices some cars brought at auction were incredibly high; they came down a bit when the economy wasn't so great.

I do get where you were going - I just think collectibles tend to be positively correlated and what you are looking for with a diversified portfolio is something that is negatively correlated.

I like the idea of commodities and futures, but have to say that they are considered too risky for most investors. I would put them mor ein the "sophisticated investor" realm.