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Re: Asset Alloc - Why not use empirically derived percentages??
Old 02-16-2007, 02:24 PM   #21
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Re: Asset Alloc - Why not use empirically derived percentages??

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Flying machines (speculative research that did not pay-off for a long time)
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A little later than the renaissance, but he also said:

“The most powerful weapon on earth is the human soul on FIRE.”

So, lets just call that first quote a mulligan?
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Old 06-01-2007, 11:02 AM   #22
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Originally Posted by ScaredtoQuit View Post
Thanks for all the feedback. For the record, I don't follow ESRBob's recommendations verbatim either. I use his allocation as a starting point and then revise it according to my comfort levels.

I suppose the fact that I was feeling a little guilty over not following the allocations blindly is what prompted me to ask the question. Now I know that I'm not much different than the rest of you.
Just saw this post -- you mean you don't follow my advice verbatim?

Good, neither do I! (Rich in Tampa was right)

Asset allocation is a personal and dynamic thing. Find targets that feel comfortable (and find as many different points of reference on how they have fared over time) and move toward them at a pace you feel comfortable with, with liberal adjustments for special circumsances.

I like the balance of 40% Equities, 40% bonds and 20% Other, and found lots of other data supporting something like a 50%-50% split giving a nice blend of low volatility and acceptable expected returns. (RetiredInvestor.com has a lot of good studies on different AAs if you're feeling like subscribing).

Then you go the next level into the kinds of equities, or bonds or other asset classes you want -- how much international, small, and what kinds of value/growth blends. With my financial advisor/collaborator for the book we tested a lot of scenarios with as many years of data as we had for this universe, but there will always be longer data series one could want on the more exotic asset classes.

As for my current deviation -- have more private equity than warranted, since I am stuck in an illiquid position in a company that is actually doing well. boo hoo.

Also, we had an investment in a condo which I got sick of (lousy building) and sold for no gain, but haven't felt ready to buy more REITs while I wait around for another good commercial real estate opportunity, so I'm underweight RE for the foreseeable future.

Think of it this way: the day after you rebalance, your AA had drifted from your targets. By a year or two later, when you rebalance again, it will have drifted further. So don't worry about getting AA precisely right -- it will always be off by at least a bit, and maybe more than a bit.
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Old 06-01-2007, 01:01 PM   #23
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Originally Posted by ScaredtoQuit View Post
I've been following with interest the asset allocation recommendations and tweaks that members of this board have been coming up with for RichinTampa. In other threads, I've also seen quite a number of other members present their own asset allocations. But I've never seen anyone indicate (or recommend) an asset allocation that has supposedly been empirically tested. What I'm talking about is the asset allocations that well respected authors have developed after testing thousands of iterations of historical data. For example, Clyatt in his book, "Work Less, Live More" (a book that I KNOW a good chunk of this board has read) comes up with a theoretical best case asset allocation. In the book, he methodically explains why this allocation is the best, how it was derived and how it was tested. So why doesn't ANYONE seem to just accept it as gospel??
Asset allocation is a personal thing. It's almost as personal as underwear, who you sleep with or the kind of beer you drink. There is more than one correct answer to all of above, and even the methods to get to the end result are quite varied.

The purpose of asset allocation is to minimize risk. It is not to maximize return. Therefore back testing gives you "returns", but it's difficult to measure risks because risks can change quickly.

I have my allocation (100% equity; 75% domestic/25% international). The domestic is 45%-15%-15% large-mid-small and the international is 15% large -10% small.

I rebalanced yesterday and sold off 1% into a bond position. I plan to do the same every 6 months until I gradually hit a 10 or 20% bond allocation (I will be close to retiring in about 25 years, maybe less, so I thought I should reduce some risk. I haven't quite figured out which % I'll reduce to accomodate the bonds (I reduced everything 1% to give me the 1% bond position for now).
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Old 06-01-2007, 01:47 PM   #24
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1966-2006 Screw asset allocation! Having finally arrived at my grand theory:

Chickenheartedness - pick the Target Retirement Series that matches my retirement situation(notice I didn't say age cause I feel young for my age).
I didn't even ask how they arrived/picked/calculated/deduced the 'right' asset allocation - at least it's diversified and cheap.

Went over ten years of early ER age 49- 62 at 60/40ish Lifestrategy moderate - never asked how they selected the weighting - note that it held 'hot rod' Asset Allocation fund which changed based on some quant formula.

BTY - there has never been a year since 1966 (with hindsight) that some allocation/split hasn't blown the barn doors off what I owned at the time. Somewhere along the line - I stopped chasing performance and just worked ongetting the job done for retirement savings/investment. That was exceedingly boring.

Did I mention a few hobby stocks on the side for entertainment purposes?

heh heh heh - - asset allocation - yes - I think I got one!
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Old 06-01-2007, 02:33 PM   #25
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I think it's a personal thing. There are a lot of tools including Monte Carlo simulation to BACKTEST returns...... If I could FORETEST returns, I would be a very rich man..........
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Old 06-01-2007, 03:26 PM   #26
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Because nobody has the balls to hold 1/3 Commodities, 1/3 EM and 1/3 Microcap and let it run for 10+ yrs. You will be rich but the volatility might kill you

-h
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Old 06-01-2007, 03:35 PM   #27
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Originally Posted by ScaredtoQuit View Post
In the book, he methodically explains why this allocation is the best, how it was derived and how it was tested. So why doesn't ANYONE seem to just accept it as gospel??
Btw if you take this argument of using the backtested results, to the logical extreme you can make an argument for just buying the best performing asset class, which would be Emerging MKts. You can infact inductively make an argument for MSFT or GOOG being the only stock you should ever own based on past performance. The problem is that little disclaimer: "Past performance is no guarentee for future results"

-h
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AA Time horizon
Old 06-01-2007, 06:02 PM   #28
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AA Time horizon

Using the 4% rule, or closer to 3% for very long time horizons, is like using an infinite time horizon. Then 185% stocks (leveraged) is optimal for stock/bond asset classes historically. Do you have the stomach for it? Diversification reduces the risk of ruin rather than increases the rate of return.
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Old 06-01-2007, 09:28 PM   #29
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An opinion coming at it from a different point of view;
Running the numbers, backtesting, analyzing and re-analyzing, is fine and the math makes people feel like it is scientific.... and to some extent it is.

I believe that one can 'exceed the precision of the model' ... and many do it all the time. IMO, I just need to get close, because there are way too many factors that we don't and can't control. ... like the economy, markets, war, terrorism, Katrina, ...etc., that will affect the stock and bond markets which will affect our finely tuned AA portfolios.

What the math should do is 'get you close' to the answer that allows you to 'sleep at night'. Something that you read and re-read a number of times and come to the conclusion that 'yeah ... this sounds right'.

Backtesting all of the different AA's tells you what has happened, not what will happen. ' ... past performance is not an indicator of future results ...'

My approach;
1) pick the AA that makes sense, in my case (pension/no pension, age, amt of assets, how long I think I will need this to last, ...etc.) 60/40 Equites/Income
2) Figure out allocation of the 60 part and the 40 part that gives me comfort (growth) and income to provide the funds to 'live on'
3) check it every year or so and get the AA back in line
4) go off and live life ... and stop my former obsessive ways
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Old 06-01-2007, 09:35 PM   #30
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An opinion coming at it from a different point of view;
Running the numbers, backtesting, analyzing and re-analyzing, is fine and the math makes people feel like it is scientific.... and to some extent it is.

I believe that one can 'exceed the precision of the model' ... and many do it all the time. IMO, I just need to get close, because there are way too many factors that we don't and can't control. ... like the economy, markets, war, terrorism, Katrina, ...etc., that will affect the stock and bond markets which will affect our finely tuned AA portfolios.

What the math should do is 'get you close' to the answer that allows you to 'sleep at night'. Something that you read and re-read a number of times and come to the conclusion that 'yeah ... this sounds right'.

Backtesting all of the different AA's tells you what has happened, not what will happen. ' ... past performance is not an indicator of future results ...'

My approach;
1) pick the AA that makes sense, in my case (pension/no pension, age, amt of assets, how long I think I will need this to last, ...etc.) 60/40 Equites/Income
2) Figure out allocation of the 60 part and the 40 part that gives me comfort (growth) and income to provide the funds to 'live on'
3) check it every year or so and get the AA back in line
4) go off and live life ... and stop my former obsessive ways
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