Asset allocation/diversification

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buyandhold's picture
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Do you still believe in those after this year?If you do, how do you allocate it and what classes do you use?Do you use the Morningstar hypo box? If so, how much more do you allocate to large caps than mid or small? Do you believe there really is a quantifiable difference between Growth and Value?Is there really such as thing as Jones' Growth and Income column?Do you need alternative investments like real estate or commodities to be diversified and how do you find those?Do you hedge?Should we just find a good asset allocation fund(s) and use that?Why is Warren Buffet get so wealthy and not appear to believe in diversification?

snaggletooth's picture
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buyandhold wrote:Do you still believe in those after this year?  Yes.If you do, how do you allocate it and what classes do you use?  Large Growth & Value, Mid Growth & Value, Small Growth & Value, International Growth & Value, Short and Long Duration Bonds, Government Bonds, International Bonds Commodities, Global Real Estate, Market Neutral, Managed Futures.Do you use the Morningstar hypo box? Only for the portion it represents.  If so, how much more do you allocate to large caps than mid or small?  Too much to type, but yes there is more in Large Cap than in Small Cap. Do you believe there really is a quantifiable difference between Growth and Value?  Yes, dividends.Is there really such as thing as Jones' Growth and Income column?  Not at Jones.Do you need alternative investments like real estate or commodities to be diversified and how do you find those?  Yes, absolutely.Do you hedge?  Yes.Should we just find a good asset allocation fund(s) and use that?  Asset Allocation funds don't include all the asset classes above.  But I guess you could use a fund like this as a core.Why is Warren Buffet get so wealthy and not appear to believe in diversification?  He has gotten large returns by concentrating.  If he can do the research and find a company that is successful or can be turned around, he can put a lot of money into it and make a lot of money.  Of course, he has the risk of losing more money too.  Also, in the past, he always lost a lot less than everyone else, so he didn't have to do as well in good markets to outperform over time.

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B24
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Don't ever try to compare a financial advisor and investing to Warren Buffet, except in very general terms. He is not a mutual fund. He buys entire companies. He is much more like GE (a conglomerate). He does not need dividends, he does not care what the day-to-day value of his business is. He BUILT a business, and actively manages it (not the minutia, but he has say over the businesses). You can also be very opportunistic when you are playing with Billions and have unlimited leverage. It does not even resemble and investor or an advisor. The only comparable is the philosophy - buy great companies at a good price and hold them forever, or until there is no longer a value proposition for the company.

As far as the other questions, if you truly follow Jones' recommendations (and not just a vague resemblance of it), you will get fair asset allocation. Look at how they build their advisory accounts. They hit all the major asset classes, and even caution (if you build them yourself) against buying similar funds, funds with overlap, and funds that have the same focus (i.e they tell you to buy "deep value", "relative value" and ...damn...I forget the other type of value fund (I'm at home) ). Point is, if yuo really dig through their stuff, and really follow what they say, you will do fine. But too many people just open up the American Funds guide and start picking funds randomly. They also have recommended portfolios for each of the fund companies. If you read their strategy for building them, they explain about avoiding overlap, the trap of using "allocation funds" (i.e Capital Income Builder), then adding funds around it with the same componants, etc.

Bottom line, the investment policy committee knows what they are doing. But I find too many FA's dumb-down the strategies, then pass them on to newbies.

I suggest you look at the report on how the IPC and the Advisory Committee (or whatever it's called) comes up with their asset allocations and fund recommendations. Specifically, look at how they receommend you setting up your own Advisory models (versus the firm models). And they do suggest alternative asset classes (granted, it's only Emerging Markets, Real Estate, and Commodities). But they include all the other major asset classes (small caps, high yield, etc.).

Hank Moody's picture
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Joined: 2008-11-10

buyandhold wrote:Do you still believe in those after this year?I didn't believe in it before this year.If you do, how do you allocate it and what classes do you use?Do you use the Morningstar hypo box? If so, how much more do you allocate to large caps than mid or small? Do you believe there really is a quantifiable difference between Growth and Value?Is there really such as thing as Jones' Growth and Income column?Do you need alternative investments like real estate or commodities to be diversified and how do you find those?Guarantees are better for managing risk than diversification. I use those. Do you hedge?I use guarantees.Should we just find a good asset allocation fund(s) and use that?I hope all of my competition continues to do that. It's so easy for me to rip this strategy apart. Why is Warren Buffet get so wealthy and not appear to believe in diversification?I'll ask him, next time I speak to him.

theironhorse's picture
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Joined: 2007-03-03

Warren loading up on EIA's?

snaggletooth's picture
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theironhorse wrote:Warren loading up on EIA's?
 
Yes, actually.  I wish I had the article about it.

buyandhold's picture
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Joined: 2008-09-23

Thanks. Very interesting.

Squash1's picture
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Do you still believe in those after this year? To an extentIf you do, how do you allocate it and what classes do you use? Do you use the Morningstar hypo box? No that is the biggest scam ever, how does a fund that is call  Small Cap Value end up in growth one year and value the next? Who am I to judge whether the fund manager considers the stock value or growth. When I do use actively managed funds I prefer funds that have no restriction on what they buy.
If so, how much more do you allocate to large caps than mid or small?
Do you believe there really is a quantifiable difference between Growth and Value? In terms of funds no. At&t would be a prime example, so funds hold it because of the dividend and some funds hold it because they got it cheap. They may try to buy stocks that are of value(but aren't they looking for the stock to GROW, when they do), same with growth they buy it because they think it is primed to grow over the next period of time(Isn't that just saying its under VALUE)Is there really such as thing as Jones' Growth and Income column? At Jones there is. I think it's a large representation of a lot of categories, so that newbies and idiots don't get in troubleDo you need alternative investments like real estate or commodities to be diversified and how do you find those? I think it depends what real estate or commodities you are buying, I think if it is a mutual fund, it is a waste of time.Do you hedge? Yes, but probably not in the way you intended to ask the questionShould we just find a good asset allocation fund(s) and use that? For people with less than $50K why not, not enough assets to do anything significant with.Why is Warren Buffet get so wealthy and not appear to believe in diversification Even if you go back to his early days when he created the 5-7 partnerships he had before he became a millionaire, he had focused holdings. I read something one time from either Munger(buffets buddy) and it was echoed by Berkowitz(fairholme fund) that essentially said Asset Allocation is a terrible idea, you are essentially spreading your risk around because you have no faith(knowledge/research) in the investments that you chose. Why not instead of buying 100 companies that you like, buy the 25 that you really know, instead of buy 75 more "just in case"
 
Munger made the quote in an issue of Fortune I got once, and I can't seem to find it ever..

newnew's picture
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Joined: 2007-02-23

B24-jones ports not so "fine". Poor correlations. Where are the treasuries and the commodities and the Mgd Futures? These classes LOWER risk thru neg corr.
 
I now LOVE to see Jones statements-- so simple to show the X-ray of MAJOR FUND OVERLAP and very poor correlation------ACAT!

Gaddock's picture
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Joined: 2007-02-23

I still believe in diversification but the basic old asset allocation is a thing that just doesnt work in a secular bear market. My models are attempting to be profitable in market neutral models. Up down left or right doesnt matter.

B24's picture
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newnew wrote: B24-jones ports not so "fine". Poor correlations. Where are the treasuries and the commodities and the Mgd Futures? These classes LOWER risk thru neg corr.
 
I now LOVE to see Jones statements-- so simple to show the X-ray of MAJOR FUND OVERLAP and very poor correlation------ACAT!
.
I agree. But some of us ( a lot of us) include those (OK, not the managed futures, although I do use funds with hedging strategies suchs as IVY Asset Strat). How have your commodity funds done this year? Pretty well correlated, huh? How's Harvard and Yale done this year? The masters of "alternative srtategies"? Down 30%? Oooooooh.

Alternative strategies aren't so alternative in deflationary environments and secular bears (even when we have a cyclical bull within it). Over long periods of time, alternative investments only reduce volatility (theoretically), they don't really enhance return (unless you are in the withdrawal phase, where low volatility is crucial). I actually think equities are the best asset class during the accumulation phase.

newnew's picture
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Joined: 2007-02-23

agreed on the commodities--that's why simple "buy and hold/rebalance" is not gonna completely do it. Things changed in sept as far as gold--- until that point the  corr was not so pos. However, RYMFX is still neg corr.
 
Jones problem is really the lack of treasuries- what is your net/net on that? No one is gonna sell it --unless it's the ETF. Hopefully Jones fully embraces ETFs finally- my old Jones friends are asking me a lot of q's about the use of ETFs.  The old "fund fam will save us in a downturn (we use Growth and Income!)" has really disappointed them.
 
ABNDX and 30 year A-rated bonds------OUCH!

Hank Moody's picture
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newnew wrote:agreed on the commodities--that's why simple "buy and hold/rebalance" is not gonna completely do it. Things changed in sept as far as gold--- until that point the  corr was not so pos. However, RYMFX is still neg corr.
 
Jones problem is really the lack of treasuries- what is your net/net on that? No one is gonna sell it --unless it's the ETF. Hopefully Jones fully embraces ETFs finally- my old Jones friends are asking me a lot of q's about the use of ETFs.  The old "fund fam will save us in a downturn (we use Growth and Income!)" has really disappointed them.
 
ABNDX and 30 year A-rated bonds------OUCH!You might want to try the Munder NetNet fund, NewNew.

newnew's picture
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Joined: 2007-02-23

sorry- don't get it.
anyway I am not with E Jones

B24's picture
B24
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newnew wrote:agreed on the commodities--that's why simple "buy and hold/rebalance" is not gonna completely do it. Things changed in sept as far as gold--- until that point the  corr was not so pos. However, RYMFX is still neg corr.
 
Jones problem is really the lack of treasuries- what is your net/net on that? No one is gonna sell it --unless it's the ETF. Hopefully Jones fully embraces ETFs finally- my old Jones friends are asking me a lot of q's about the use of ETFs.  The old "fund fam will save us in a downturn (we use Growth and Income!)" has really disappointed them.
 
ABNDX and 30 year A-rated bonds------OUCH!
 
Maybe I'm naive, but I have not met a Jones FA that does not consider treasuries as part of their allocation.  Not that they all include it, but I have never heard someone say you shouldn't use them.  I include them in a lot of portfolios.  And ABNDX includes around 10% in Treasuries and Agencies.

newnew's picture
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I can tell by your posts that you know what's up, B24. I just know that increasing commission to a rep based on bond length of maturity creates a lot of long durations and the resulting price swings.

Hank Moody's picture
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newnew wrote:I can tell by your posts that you know what's up, B24. I just know that increasing commission to a rep based on bond length of maturity creates a lot of long durations and the resulting price swings. I can tell by your posts that you don't know what's up. Length of maturity is determined by the issuer of the debt. I hope you're not trying to help people with actual money.

chief123's picture
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Joined: 2008-10-28

I can tell by your posts that you don't know what's up. Length of maturity is determined by the issuer of the debt. I hope you're not trying to help people with actual money.

That's funny..

HymanRoth's picture
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newnew wrote:I can tell by your posts that you know what's up, B24. I just know that increasing commission to a rep based on bond length of maturity creates a lot of long durations and the resulting price swings. If you understood the time value of money you would also understand why the commissions on longer-term paper are higher.

Borker Boy's picture
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B24's picture
B24
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Hank Moody wrote: newnew wrote:I can tell by your posts that you know what's up, B24. I just know that increasing commission to a rep based on bond length of maturity creates a lot of long durations and the resulting price swings. I can tell by your posts that you don't know what's up. Length of maturity is determined by the issuer of the debt. I hope you're not trying to help people with actual money.
 
I think you got what he was saying.  His point was that an advisor's efforts to increase commissions have a negative effect on portfolio because you are reaching for long bond commissions (which have longer durations, wider price swings, etc.).

WealthManager's picture
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buyandhold wrote:<?: prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Do you still believe in those after this year?
Of course…but those are not the only things that I believe in.
 
buyandhold wrote:
If you do, how do you allocate it and what classes do you use?
Here is an example of an allocation I like to use:
20% Real Assets
40% Fixed Income
          30% Bonds
          10% Target Return
40% Equity
          30% Public
          10% Private
 
Of course this is for Large >$1.5MM porfolios
 
buyandhold wrote:
Do you need alternative investments like real estate or commodities to be diversified and how do you find those?

If your asset size can justify then yes, you need AI.
 
buyandhold wrote:
Do you hedge?
Whenever possible…unfortunately typically only on larger accounts.
 
buyandhold wrote:
Should we just find a good asset allocation fund(s) and use that?
MALOX works well
 --WM

snaggletooth's picture
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Joined: 2007-07-13

Borker Boy wrote:
Has anyone heard of this cat?
http://www.portfolio.com/views/blogs/market-movers/2008/07/02/jeffrey-epstein-and-the-private-banking-industry
 
Yes.  It's Hank Moody.

newnew's picture
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Joined: 2007-02-23

Hank: huh?
 
Just cuz a bond exists does not mean I have to buy it. I'll CHOOSE THE SHORTER ONES if that's best for the client (as I get paid the same either way).

Hank Moody's picture
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Joined: 2008-11-10

newnew wrote:Hank: huh?
 
Just cuz a bond exists does not mean I have to buy it. I'll CHOOSE THE SHORTER ONES if that's best for the client (as I get paid the same either way).Sounds like you'll have a pretty easy time getting into heaven.

newnew's picture
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Joined: 2007-02-23

thx

gregoron's picture
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Joined: 2008-09-18

buyandhold wrote:Do you still believe in those after this year?If you do, how do you allocate it and what classes do you use?Do you use the Morningstar hypo box? If so, how much more do you allocate to large caps than mid or small? Do you believe there really is a quantifiable difference between Growth and Value?Is there really such as thing as Jones' Growth and Income column?Do you need alternative investments like real estate or commodities to be diversified and how do you find those?Do you hedge?Should we just find a good asset allocation fund(s) and use that?Why is Warren Buffet get so wealthy and not appear to believe in diversification?My take:Yes, I still believe in asset allocation despite this year's downturn.  I allocate among domestic equities and bonds, international equities and bonds, absolute return funds, alternative investments (i.e. managed futures, market neutral, commodities, REITS, etc.), and cash.No, I no longer use the MS style box as I did before.I hedge with bear market funds sometimes, but for specific clients.I use asset allocation funds for smaller accounts only.I think WB still believes in diversification, but not as we advisors know it.  He diversifies his holdings by buying companies at discount prices.  As owner and stakeholder, he also has a lot of influence on how his companies' stocks perform.

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