Allocation Returns

xxxx

[LOL!]

Some of what you want might be here:
http://www.fundadvice.com/articles/b...llocation.html
and in other articles at the same site.

[Spanky]

Quote:

Originally Posted by LOL! Some of what you want might be here: http://www.fundadvice.com/articles/b...llocation.html and in other articles at the same site.

The table suggests that 100% equity is the best for a long investment horizon.

[LOL!]

Quote:

Originally Posted by BabyApe LOL! Do you use thier model portfolio?

No, but Merriman's web site has influenced my asset allocation just as the writings of Bernstein and many others have.

Quote:

Originally Posted by Spanky The table suggests that 100% equity is the best for a long investment horizon.

Only if you ignore risk and the efficient frontier.

[wildcat]

100% equity portfolio looks the best in a straight return sense but it doesn't account for return per unit of risk. According to "theory", we, as risk averse people, should choose the highest return portfolio per unit of risk or the highest return/lowest risk.

[Spanky]

Quote:

Originally Posted by wildcat 100% equity portfolio looks the best in a straight return sense but it doesn't account for return per unit of risk. According to "theory", we, as risk averse people, should choose the highest return portfolio per unit of risk or the highest return/lowest risk.

If we considered the Sharpe ratio as the basis for optimal return, 10% equity is the best.

Sharpe Ratio = (return - risk free) /STD

fixed
Income  1.26
10	  1.42
20	  1.32
30	  1.20
40	  1.06
50	  0.95
60	  0.86
70	  0.80
80	  0.75
90	  0.70
100	  0.66
S&P500	0.47

[ESRBob]

LOL,
Thanks for posting this -- great resource. I like Merriman and have his most recent book "Live it Up without outliving your money!". He is a financial planner, though, and charges a fee for his services.

Which may be why for some of us, the numbers could look even better than those on his chart -- he has taken out 1% management fee from the returns in the table. If you were able to buy the funds and manage your own portfolio, you should be able to do even better.

[mb]

Babyape,

A do-it-yourself suggestion:

Run FIREcalc with a zero withdrawal rate and various stock/bond allocations.

Click the "Detailed Results" button to get the year-by-year results and pull the results into Excel and plot them as distribution functions.

The higher return/extra risk for stocks will give a higher average return but will also have a broader distribution with more negative returns for the short time periods.

MB

[wildcat]

Equity Sharpe
10.0% 0.222222222
20.0% 0.340909091
30.0% 0.418181818
40.0% 0.434782609
50.0% 0.44047619
60.0% 0.43
70.0% 0.431034483
80.0% 0.424242424
90.0% 0.416107383
100.0% 0.407185629

I got something different Spanky It was more in line with what I would have expected.

[bosco]

Quote:

Originally Posted by ESRBob L Which may be why for some of us, the numbers could look even better than those on his chart -- he has taken out 1% management fee from the returns in the table. If you were able to buy the funds and manage your own portfolio, you should be able to do even better.

I agree, but let's give him credit for taking the 1% out of the table. I get the feeling that many of his ilk conveniently don't do this. His website has a lot of useful information.

I remember back in the 1980s he coauthored a book on (gasp!) market timing and how to generate your own timing signals. I used a version of his system and deftly side-stepped the 1987 crash. That was the upside. The downside is I didn't get back in at the bottom.

I am no longer a "dirty market timer" (mostly because it doesn't fit my emotional temprament) but nevertheless think there IS a place for timing, unlike many on this board. Merriman's website is a source of useful info on this as well, although I'm not sure his signals are the best.

[ESRBob]

Baby Ape,
5-10% should be fine. It kind of depends on how many different asset classes you are in -- the more you delve into foreign bonds, commodities, oil and gas, international equities etc the fewer percents you have to go around and that might squeeze you toward the 5%. If you are just in some plain vanilla US stocks and US bonds, then it makes sense to be higher on your REITs (10% or so) as something that will be diversifying you away from the risks somewhat of those other asset classes.