Articles about Asset Allocation

The Ultimate Income Portfolio: 7.1% Yield with Low Risk, 2014
In July of 2010, I introduced a portfolio-construction strategy called the Ultimate Income Portfolio (UIP). I have updated that strategy annually, revising the holdings and reviewing the previous year’s results. My goal is to provide the maximum available yield while diversifying to reduce risk. I set a target risk, which is within the range that most individual investors seek. I also sell covered call options against portfolio holdings to increase income.

In this article, I analyze the performance of last year’s UIP and generate the UIP for 2014-15. The result is a portfolio that yields 7.1% with a risk level equivalent to a 70/30 stock/bond index fund. I also explore some of the lessons learned from four years of tracking and revising the portfolios.
See full article at AdvisorPerspectives.com...
The Risk Forecast for 2014, 2014
It’s the time of year when market pundits take to the notoriously difficult task of forecasting returns. Volatility is equally important, however, and it can be predicted much more reliably than asset-class performance. My forecast shows that the options market is underestimating risk in 2014, giving investors an opportunity to purchase portfolio protection at attractive prices.

See full article at AdvisorPerspectives.com....
The Bomb Shelter Portfolio: Maximum Income with the Least Risk, 2013
Conservative investors are faced with unappealing choices. They can reduce risk and accept low yields and high exposure to rising rates, or they can push the bounds of their risk tolerance to increase yield. My analysis shows a way out of this predicament: a “bomb shelter” portfolio of exchange-traded funds (ETFs), which offers attractive yield with minimal volatility and exposure to rising rates.

See full article at AdvisorPerspectives.com...
Dr. Andrew Lo: ‘Buy and Hold” Does Not Work Anymore, 2012
See full article at Morningstar.com... The MIT/Sloan School of Management professor and Director of MIT’s Laboratory for Financial Engineering has been widely quoted on the implications of the 2008 financial crisis. One theme that Dr. Lo emphasizes repeatedly is that the risks associated with different asset classes can vary dramatically over time and for this reason, risk must be tracked, forecasted and budgeted. In a world in which the risk of any given asset class (and therefore, also the risk of any portfolio of asset classes) can change dramatically in a short period of time, a passive buy-and-hold approach may, in fact, result in unacceptable levels of volatility.
See full article at Morningstar.com...
Standing at the Close of 2011
This has been a chaotic year in the financial world. In this latest article, I will take a look at what happened in 2011 and give my personal views on where things are going for 2012.
See full article at Portfolioist.com...
Target Date Funds: Does Retirement Promise Match Reality?, 2011
The aggregate performance numbers and evidence suggesting that most investors are holding inappropriate asset allocations foretell disaster for investors who are relying on their 401(k) plans as the primary source of their retirement income.
See full article at Seeking Alpha...
Reexamining Bill Gross’ Decision to Sell Treasury Bond, 2011
Bill Gross made headlines in February by asserting that U.S. Treasury bonds were not providing enough yield to make them worth the risk and reducing his allocation to zero in the PIMCO Total Return Fund (institutional share class PTTRX). The subsequent rally forced him to admit his mistake in August, but by then his fund was trailing 90% of its peers and having its worst year since 1995. I will examine Gross’ February decision in retrospect, to illustrate its tactical and strategic costs and benefits for his shareholders.
See full article at Advisor Perspectives...
Building a Better Income Portfolio, 2011
One of the greatest concerns for income-oriented investors is the possibility that dividends will be cut. The financial crisis showed that traditional metrics, such as a stock’s dividend history and its payout ratio, failed to warn investors of impending dividend cuts. By evaluating stocks based on volatility, however, investors can select securities that are more likely to maintain or improve their dividend rates.
See full article at Advisor Perspectives...

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How to Build a Low-Risk High-Income Portfolio, 2011
Prominent investors, including Bill Gross and Warren Buffett, now say that the yields on long-term government debt do not justify the risks. But is this perception correct? I offer a way to answer that question – and to construct a low-risk high-income portfolio – using the prices of put options to derive the true risk levels of various asset classes.
See full article at Advisor Perspectives...

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Do-It-Yourself Equity-Indexed Annuities, 2011
Equity indexed annuities offer retirees a compelling combination of guaranteed income and participation in the market’s upside. But EIAs are exceedingly complex and have been the subject of numerous regulatory challenges. For those who seek a simpler alternative with a comparable return profile, a combination of fixed-income securities and options is viable choice.
See full article at Advosro Perspectives...
The Danger in European Stocks, 2011
European equity prices, depressed by fears of a sovereign debt crisis, are cheap to such a degree that William Bernstein, author of The Intelligent Asset Allocator, called them a true bargain. Income-oriented investors, in particular, may be tempted by 4.2% dividend yields and a market-wide P/E ratio of approximately 11. My analysis, however, contradicts Bernstein’s and shows the underlying risk those investments carry.
See full article at Advisor Perspectives...

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An Important Challenge to ‘Stocks for the Long Run’, 2011
Jeremy Siegel’s dictum – to invest in stocks for the long run – faces a new challenge. A recent paper by Robert Stambaugh, a Wharton colleague, and Lubos Pastor of the University of Chicago says that once you take into account the uncertainty of estimating future returns, stocks are not nearly as attractive to retirement-oriented investors as Siegel has claimed.
See full article at Advisor Perspectives...
Asset Allocation for Grantham’s Seven Lean Years, 2010
Followers of Jeremy Grantham know his consistently accurate long-term forecasts well, as well as his ability to identify and avoid asset bubbles and steer clients into high-performing asset classes. His January 2010 letter to investors attests to his record and offers his latest forecast for the next seven years – his standard prediction time horizon.
See full article at Advisor Perspectives...
Three Ways to Improve Safe Withdrawal Rates, 2010
Few problems facing financial planners have been as extensively studied as sustainable withdrawal rates (SWRs). Today, the conventional wisdom holds that a 4% SWR is reasonable, given a traditional 60/40 approach. But higher SWRs can be achieved in a number of ways, and the last chapter in the search for better deaccumulation planning is yet to be written.
See full article at Advisor Perspectives...
Additional Thoughts on the “New Normal”, 2009
The following is in response to a letter to the Editor from Larry Katz which appeared last week. That letter was in response to Geoff Considine’s article, What the New Normal Means for Asset Allocation, which appeared two weeks ago.

I received a number of positive responses to my article, The New Normal and Asset Allocation. A less-than-enthusiastic comment (see here) was sent in by Larry Katz, the Director of Research at Merriman, Inc. Mr. Katz took the time to draft his critique because I used one of Merriman’s published model portfolios as an example of the current standards in strategic asset allocation. See full article at Advisor Perspectives...
What the New Normal Means for Asset Allocation, 2009
A New Normal is coming into focus, providing a glimpse of the slow growth and higher inflation that may soon characterize the U.S. economy. Warnings about this alarming prospect have been articulated by Bill Gross of PIMCO and by his colleague Mohammed El-Erian.

PIMCO’s new paradigm is not, in fact, that new. Many of its themes are described in detail in El-Erian’s book, When Markets Collide. In it, El-Erian warned investors to prepare for an increasing economic shift of power to emerging markets and increasing correlations between major asset classes. See full article at Advisor Perspectives...
Additional Thoughts on the “New Normal”, 2009
  1. The following is in response to a letter to the Editor from Larry Katz which appeared last week. That letter was in response to Geoff Considine’s article, What the New Normal Means for Asset Allocation, which appeared two weeks ago.

    I received a number of positive responses to my article, The New Normal and Asset Allocation. A less-than-enthusiastic comment (see here) was sent in by Larry Katz, the Director of Research at Merriman, Inc. Mr. Katz took the time to draft his critique because I used one of Merriman’s published model portfolios as an example of the current standards in strategic asset allocation. See full article at Advisor Perspectives...
Opportunities in a High Correlation World, 2009
One of the most striking features of 2008 was the fact that correlations between most asset classes went up substantially: everything declined at the same time. One of the principal motivations behind diversifying is that all of your holdings will not decline at the same time. Declines in one class will be buffered by gains in another—or at least lesser losses in others. This effect has not provided much buffer in 2008.
See full article at Seeking Alpha...
Did Portfolio Planning Tools Fail Investors in 2008?, 2009
The Wall Street Journal ran an article on May 2, 2009 called “Odds-On Imperfection: Monte Carlo Simulation.” The sub-title is “Financial Planning Tool Fails to Gauge Extreme Events.” The main point of the article is that Monte Carlo Simulations did not predict the potential for a market meltdown on the scale of what we experienced in 2008. This article reinforces some common misconceptions about Monte Carlo planning tools and probabilistic models in general. As the author of a Monte Carlo planning package, I got quite a few questions about this article.
See full article at Seeking Alpha...
Are Index Funds the Only Rational Choice?, 2008
There are many experts who believe that investors ought to invest in funds that track a broad index [pdf file], and should not invest in smaller numbers of individual stocks. This idea has always rather bothered me because the arguments supporting it seem to be based on some simplistic assumptions. Is it really more intelligent to hold all 500 stocks in the S&P 500 than to hold a smaller number of stocks?
See full article at Seeking Alpha...
Tactical Asset Allocation, Part I, 2008
The term “market timing” means different things to different people. Several basic truths are unassailable. First, most investors hurt their performance by chasing hot asset classes. Second, there is evidence for momentum effects in asset class performance—which suggests that it might be possible to time the market successfully. Third, the price you pay for something matters. In the institutional world, market timing is typically referred to by a more respectable name: Tactical Asset Allocation [TAA].
See full article at Seeking Alpha...
Tactical Asset Allocation, Part II, 2008
In a recent article, I discussed Tactical Asset Allocation [TAA] and its relationship to Strategic Asset Allocation [SAA]. To take advantage of both TAA and SAA, it is necessary to build a highly diversified portfolio that has a projected future return that is greater than the returns that the portfolio has generated in recent years (i.e. the assets in the portfolio have generated less-than-expected returns in recent years). The recent under-performance means that the portfolio is due for a reversion to the mean and provides the potential for a performance boost beyond long-term expected returns (the TAA component). The core Strategic Asset Allocation ensures that the portfolio derives the maximum available diversification benefit and has a total volatility that is consistent with the needs of the investor(s).
See full article at Seeking Alpha...
Asset Allocation Through ETFs and the Income Glide Path, 2007
Many investors have become familiar with the concept of the ‘equity glide path,’ which is the name given to the gradual shift in portfolio allocation from equities to fixed income with an investor’s age. I have been thinking about a similar concept for the life cycle of savings, investment, and income draws from a portfolio in retirement—and I have taken to thinking about this trajectory as the income glide path.
See full article at Seeking Alpha...
Making Sense of Trailing Performance, 2007
This article is inspired by a question that I received from a trial user of our portfolio planning software. This person likes a mutual fund called the American Funds Capital World Growth and Income Fund (ticker: CWGIX). This fund, currently rated five stars by Morningstar, has generated annualized returns over the past five years (through 8/31/2007) of 20.7% per year. This is, as it name implies, an internationally focused fund, and world stock indices have done very well over this period---but this fund has out-performed the indices against which Morningstar benchmarks it, and this is the cause of the five star rating. Fair enough. The investor was analyzing this fund as part of a portfolio using Quantext Portfolio Planner, a planning tool and he felt that he had found a paradoxical result in QPP’s forward view. The issue with this particular fund bears on the far larger issue of how to treat trailing performance of a fund.
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Rethinking Rebalancing, 2007
There are a number of concepts in investing that are treated as though they are as well thought out as gravity—simple, inexorable, and undeniable. The basic idea of rebalancing as it is typically put to investors seems reasonable. Over time, certain parts of a portfolio will out-perform and certain parts will under-perform. At the end of some period of time, those assets that have done really well will make up a higher fraction of your portfolio and vice versa. If you are shooting for a portfolio with a specific allocation to sectors or individual positions, you will then sell some fraction of the betterperforming assets and buy more of the under-performing assets to bring the percentages back to the original target...Mr. Bogle’s analysis [however] suggested that annual re-balancing adds no net value. He looked at a portfolio with a target allocation 50% S&P500 / 50% bonds for all 25-year periods from 1826 to the present. He also looked at a portfolio with a target allocation that is 48% S&P500, 16% small cap, 16% international, and 20% bonds over the past 20 years. In both cases, he found no value added by annual re-balancing. Consider, however, the powerful intuitive case in favor of rebalancing—albeit anecdotally. If you were riding the dot-com wave and had annually re-allocated by selling some of your high fliers and buying under-performing assets that exhibited low correlation to tech stocks (like utilities or REIT’s), you would certainly be better off today than if you did not rebalance. How do we reconcile the commonsense perspective from the dot-com era with Mr. Bogle’s results?
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All-ETF Portfolios vs. Strategic Mix of Stocks, 2006
One of the interesting issues in portfolio planning is as to the relative merits of investing in a portfolio of all mutual funds or ETFs as compared to including a strategic mix of individual stocks. This is a particularly important issue because many retirement plans do not allow their participants to invest in individual stocks...There are, of course, real costs to investors when investments are handled by ‘intermediaries’—the fund managers. Aside from the known costs, made painfully clear by the eminent Mr. Bogle (see link above), there are lesser-known portfolio impacts of building a portfolio from a set of funds.
See full article at Seeking Alpha...

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