Now more than ever, the retail investor can invest in any asset class in any country, something that we could not do before the introduction of ETFs.
Many academic studies show that 80 to 90% present of your returns will depend on the asset class that you are invested in and not on your timing or stock picking ability. I know that no everyone agrees with this, but let’s stop for a moment and suppose that the academics are correct, prove that the academics are correct are the very two very successful Universities Endowments of Yale and Harvard.
The Yale Endowment asset allocation diversification is:
Each of which should comprise between 5% and 30% of the portfolio
1. Domestic Equity (30%)
2. Foreign Developed Market Equity (15%)
3. Emerging Market Equity (5%)
4. Real Estate (20%)
5. U.S. Treasury Bonds (15%)
6. U.S. Treasury Inflation-Protected Securities (15%)
The Harvard Endowment asset allocation diversification is:
U.S. equities (15%)
Commodities 13%
Private Equity 13%
Hedge Funds 12%
U.S. Bonds 11%
Foreign Equities 10%
Real Estate 10%
Inflation-Indexed Bonds 6%
Emerging Markets 5%
High-Yield 5%
Foreign Bonds 5%
Borrowed Money -5%
I personally agree with some aspects of the theory and disagree with others; I agree in the sense that asset allocation is among the most important things in trading, an example is that if you select to trade stocks and they are in a downtrend and bonds are in un uptrend you are going to be able to make more money by being in bonds that by being in stocks. So the asset class that you choose to trade I would not say that is 90% of your returns but I do believe that trading the correct asset class your returns will increase a lot. With the introduction of ETF this is also possible.
I disagree with the academics in having a maximum % allocation to the asset classes, I personally think that sometimes you should invest more than 30% in certain categories and other times you should not have even a penny in some of the categories, not invest 5% just for the sake of diversifying (that in my opinion will be diworsifying) and because every asset category should have a maximum of 30% and a minimum of 5% allocation.
Then the key question by traders that think like me and believe in the importance of asset allocation but not on specific or static asset allocation, becomes what are the best categories (Bonds, Commodities, Stocks, Emerging Markets etc) to trade right now?
One way, is to do a relative strength analysis of the different categories and see and trade the best performing ones. The problem with this strategy is that the market has had a big advance and you do not know how much further is going to go. The upside is that this strategy has been tested in many markets and works.
Please give me your opinion and advice on other ways to find the best categories to trade in.
Many academic studies show that 80 to 90% present of your returns will depend on the asset class that you are invested in and not on your timing or stock picking ability. I know that no everyone agrees with this, but let’s stop for a moment and suppose that the academics are correct, prove that the academics are correct are the very two very successful Universities Endowments of Yale and Harvard.
The Yale Endowment asset allocation diversification is:
Each of which should comprise between 5% and 30% of the portfolio
1. Domestic Equity (30%)
2. Foreign Developed Market Equity (15%)
3. Emerging Market Equity (5%)
4. Real Estate (20%)
5. U.S. Treasury Bonds (15%)
6. U.S. Treasury Inflation-Protected Securities (15%)
The Harvard Endowment asset allocation diversification is:
U.S. equities (15%)
Commodities 13%
Private Equity 13%
Hedge Funds 12%
U.S. Bonds 11%
Foreign Equities 10%
Real Estate 10%
Inflation-Indexed Bonds 6%
Emerging Markets 5%
High-Yield 5%
Foreign Bonds 5%
Borrowed Money -5%
I personally agree with some aspects of the theory and disagree with others; I agree in the sense that asset allocation is among the most important things in trading, an example is that if you select to trade stocks and they are in a downtrend and bonds are in un uptrend you are going to be able to make more money by being in bonds that by being in stocks. So the asset class that you choose to trade I would not say that is 90% of your returns but I do believe that trading the correct asset class your returns will increase a lot. With the introduction of ETF this is also possible.
I disagree with the academics in having a maximum % allocation to the asset classes, I personally think that sometimes you should invest more than 30% in certain categories and other times you should not have even a penny in some of the categories, not invest 5% just for the sake of diversifying (that in my opinion will be diworsifying) and because every asset category should have a maximum of 30% and a minimum of 5% allocation.
Then the key question by traders that think like me and believe in the importance of asset allocation but not on specific or static asset allocation, becomes what are the best categories (Bonds, Commodities, Stocks, Emerging Markets etc) to trade right now?
One way, is to do a relative strength analysis of the different categories and see and trade the best performing ones. The problem with this strategy is that the market has had a big advance and you do not know how much further is going to go. The upside is that this strategy has been tested in many markets and works.
Please give me your opinion and advice on other ways to find the best categories to trade in.
