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Efficient Asset Allocation Strategies for Optimal Returns

Explore the key methods of asset allocation, from strategic to market timing. Learn about equities, fixed income, and alternative investments. Discover how to determine your asset allocation based on risk tolerance, goals, and tax efficiency. Utilize rebalancing techniques to maintain your desired portfolio mix for long-term success.

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Efficient Asset Allocation Strategies for Optimal Returns

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  1. Asset Allocation!! Virtual Boglehead Chapter Manny

  2. What is asset allocation? -Wikipedia -Boglehead Wiki

  3. Methods of Asset Allocation • Strategic – “Buy and Hold” • Tactical Asset Allocation – based of economic or valuations factors • Market Timing – predicting market moves and investing based on predictions

  4. Equities: ownership in a public company = stocks Cash Equivalents : Savings, money market, Cash deposit (CDs)

  5. Fixed Income: Bonds – a loan issued to a holder with a return on interest Alternative Investments: Hedge funds, real estate, commodities

  6. Capitalization ( sum of a corporation's stock, long-term debt and retained earnings = outstanding shares multiplied by share price.) Style – type of fund being invested in VGTSX

  7. Style -Value -  stocks are selected that trade for less than their intrinsic values. Solid “fundamentals” - E.g. Fitbit example -Growth - company whose earnings are expected to grow at an above-average rate relative to the market. -E.g. Are overvalued by market but expected to grow – e.g. Amazon -Blend – combination of Value and Growth • Capitalization • -Large - > $10 billion • -Medium – $2 – 10 billion • -Small - < $2 billion

  8. Equities • Higher risk and Higher Rewards • Tolerate up to 50% drop in stocks • S&P500 Annual CAGR inflation adjusted • 6.66% (for the century) • 5.72% (for the decade) • 10.65% (for the past 5 years) • 5.02% (for the past year) • International • Recommended to have 20-40% per Vanguard White paper • Currency diversification • Domestic • “recommended” to have between 60-80% of equities in domestic stocks (for US citizens)

  9. More Details – Bonds and TIPS • Bonds – 2-4% return • Short and intermediate term bond funds • More stable against market crashes • Tax-exempt municipal bonds • Treasury Inflation Protected Securities (TIPS) • treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation • Acts as a bond fund though is a security

  10. The Efficient Market Hypothesis • Markowitz

  11. The Efficient Market Hypothesis • You don’t know anything that everyone else does not • All our collective knowledge is already in the price • Market timing is futile • Stop listening to the noise! • Jack Bogle: The “Low Cost” hypothesis: Costs matter, markets don’t have to be efficient

  12. -Wharton’s Executive Education Website

  13. Callan’s Periodic Table of Investments

  14. Risk • Risk – uncertainty of investment (often measured by standard deviation) = volatility • Risk tolerance – an individuals ability to tolerate risk • Swedroe Factor’s for Risk Tolerance • Ability – based on age/retirement age/stability of income, liquidity of assets • Willingness • Need

  15. What Does This Mean?

  16. How to Determine Your Asset Allocation? • Based on ability, need and willingness • Based on goals • Maximizing Reward for risk • Utilizing tax-efficiency • Allocating between Tax Advantaged (Roth IRA, IRA, 401k, 529) and non-tax advantaged (brokerage, cash) accounts • Finding index funds with lower Expense Ratios

  17. How is it done? For example: • Emergency Fund • Cash $5k • CD $5k • Brokerage Account • VGTSX (International Index) $20k (20%) • Roth IRA • TIPS $10 k (10%) • 401k • VTSMX (Domestic Index) $30k (30%) • VBIIX (Intermediate bond fund) $30k (30%)

  18. What to do in the future? Rebalancing • Likely only more helpful when in volatile market situations • Rebalancing more often does not lead to better results • Variation in frequency of rebalancing (month to year timeframe)

  19. Rebalancing Example VGTSX increases 100% in value to 40k You can either invest bond funds, domestic or TIPS and/or sell VGTSX • Portfolio Value (100k) • Desired AA = Intl Eq (20), Domestic Eq (50), Bonds (20), TIPS (10) • Emergency Fund • Cash $5k • CD $5k • Brokerage Account • VGTSX (International Index) $20k (20%) • Roth IRA • TIPS $10 k • 401k • VTSMX (Domestic Index) $50k • VBIIX (Intermediate bond fund) $20k • Portfolio Value (120k) • Desired AA = Intl Eq (20), Domestic Eq (50), Bonds (20), TIPS (10) • Emergency Fund • Cash $5k • CD $5k • Brokerage Account • VGTSX (International Index) $40k (30%) • Roth IRA • TIPS $10 k • 401k • VTSMX (Domestic Index) $50k • VBIIX (Intermediate bond fund) $20k • Portfolio Value (120k) • Desired AA = Intl Eq (20), Domestic Eq (50), Bonds (20), TIPS (10) • Emergency Fund • Cash $5k • CD $5k • Brokerage Account • VGTSX (International Index) $24k • Roth IRA • TIPS $12 k • 401k • VTSMX (Domestic Index) $60k • VBIIX (Intermediate bond fund) $24k

  20. Resources • Boglehead Forum and Wiki • Richard Ferri – Asset Allocation • Larry Swedroe • White Coat Investor

  21. Q& A • Should valuation changes determine AA changes?

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