As I continue my never ending investment education I have graduated to the issue of asset allocation. Most of the books I have read are text books written by PhD.'s and the like from well known business schools. One was written by a manager that runs the famous Yale endowment.
The bottom line is that by spreading one's investments among multiple asset classes one can achieve greater returns with less risk. Relevant asset classes are domestic, international and emerging market stock (although I just read about a new category called "frontier" markets which include Africa and the like"), domestic and international government bonds, domestic and international corporate bonds, real estate (including REIT's), commodities, BDC's and the list goes on and on.
The best portfolios have assets which don't correlate to one another. In other words, when one asset class sinks another rises. Lately we have seen that when the market is doing well precious metals have been hit hard. In 2008 when the market tanked precious metals soared.
Asset allocation goes beyond diversifying and not putting one's eggs in one basket. It is based upon the belief that the market is fairly efficient and that we all flatter ourselves into believing that we can beat the S&P. Most proponents purchase passive index ETF's or funds and divide their portfolio into predetermined percentages based upon their wants and needs. The research seems to bear out that periodic rebalancing to keep the percentages intact increases returns and lowers risk.
I have been investing in dividend growth stocks in many sectors, REIT's, a BDC, muncipal bonds and cash. My desire to diversify has given me a head start in asset allocation but I would not like my portfolio to be scrutinized as of yet. I will look to add emerging market and international stock and bond exposure with an eye toward what is out of favor now. To the extent I can I will be looking for low expenses and monthly distributions. By buying what is out of favor now one can get the benefit of mean reversion.
Investing involves continuous education and or learning process. The stock market arena evolves. Thus, investors should also be aware of these changes to maintain their profits.
ReplyDeleteInteresting post on asset allocation. Asset allocation is thought of as strictly stocks and bonds or cash and nothing else. But it also should include preferred stocks along with real estate investment trusts both of which are a different class of securities preferred securities have both equity and fixed icome characteristics. Real estate investment trusts are a hard asset as it were. While gold and silver are considered a investment class they produce no income or growth unless were talking gold and silver stocks not owning the metal itself. Another factor to consider is some type of investment class thats totally unusual a good example of this is the merger fund what this fund does is buy companies that are involved in takovers mergers and the like the idea is to buy a stock thats involved in some kind of a deal at something less that what the final offer might be in a takover for example. When investing in a fund like the merger fund what your really doing is creating a totally different class of assets that did not exsist before. I also like the idea of buying companies involved in buying brands trade marks not making or selling the services or products but owning the rights to a popular brand or trademark and loaning them out for a fee for example their was something on mad money thats CNBC about a company that does exactly that. I would like to find some kind of trust that trades as a public company that buys and sell collectables.
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