“Steve, how do you allocate your assets?”
My subscribers often want to know… but I hesitate to give them an answer.
It’s not because it’s a secret… It’s because what I do is pretty darn far from the “mainstream” advice. I call it “opportunistic allocation.”[ad#Google Adsense 336×280-IA]I wouldn’t recommend what I do for most people – but I will share what I do with you today.
Before I share what I do, let’s briefly start with the mainstream advice…
The simplest version of the mainstream advice is the “60/40 portfolio” – that’s 60 percent in stocks and 40 percent in bonds.
A 60/40 portfolio works well when you look back over 100 years of financial history…
Stocks have delivered significantly higher returns than bonds over history. However, stocks have been three times more risky (more volatile) than bonds, based on history. So by having a 60/40 portfolio, you can still earn stock-like returns – but you lower your risk dramatically.
This idea works, in principle. The problem is, you and I don’t have 100 years to invest. Our investing lifetimes are much shorter.
Another problem is, sometime stocks (or bonds) are extremely overpriced, and therefore will not live up to their part of the bargain in the 60/40 portfolio during your investing time frame.
For example, in 1999, U.S. stocks were more expensive than they’d ever been in history. So in my personal portfolio, I avoided U.S. stocks for about a decade. Instead of 60% in stocks in 1999, I was personally more like 6% – or less – for a decade.
When stocks were so expensive in 1999, it would have been foolish to follow the mainstream advice over the next decade. In hindsight, you would have lost money on 60% of your portfolio – for 10 years.
Here in 2015 – after soaring since 2009 – stocks are getting “up there” in price again. They are no longer cheap.
And bonds are an even worse proposition… Hedge-fund manager Cliff Asness of AQR (http://www.AQR.com) – one smart guy – estimates that bonds will return less than 1% a year (after inflation) over the coming years.
So stocks might struggle over the long run. And bonds might deliver less than 1% a year after inflation over the long run. The mainstream advice of 60% stocks/40% bonds is starting to look pretty terrible.
So what can you do?
Here’s what I do…
I am an “opportunistic” allocator… I typically sit with a lot of cash until something incredible comes along.
It doesn’t matter if its stocks, bonds, real estate, commodities, or whatever – it just needs to be exceptional.
I personally bought stocks heavily in late 2008/early 2009. It was an exceptional moment. I over-allocated to stocks – and did extremely well. Then, from 2011 until today, I’ve been buying real estate.
I’m currently over-allocated to real estate, by mainstream standards… You might call me “cash poor” because I’ve invested so heavily. But I’m okay with that. The opportunity has been too great. I had to act.
As you can see, I don’t think about allocation like most people do…
I don’t think about being 60/40 anything. Instead, I think, “What’s my risk?” and, “What’s my potential reward?” When I find something incredible, I’m in. So my personal allocations have been all over the place, in both asset classes and countries.
Today, I have almost no exposure to bonds. I do have some exposure to the stock market, but not a lot. Real estate is where I’m significantly “opportunistically” allocated today.
Emerging market stocks are much more appealing to me today than U.S stocks, as well. And I think commodities and precious metals will have a strong comeback someday. However, I’m far more invested in U.S. real estate today than I am in stocks or any other asset class – and I’m okay with that.
My “opportunistic investing” has worked out extremely well for me. But I worry about telling others what I do…
I’ve hesitated to share what I do with people because it can definitely be done the “wrong” way. It probably will be done the wrong way by most people… My fear in sharing this is that it will give somebody the license to over-allocate to a bad idea.
You can call me reckless, if you like. You could call me non-diversified, which is a cardinal sin as a ‘legitimate” investor.
But how is allocating to the mainstream 60/40 portfolio over the next decade any better?
Following the mainstream advice, you’d buy stocks (that have already soared dramatically) and bonds (that probably won’t make you any money after inflation) over the next 10 years.
Based on that, what good is the mainstream advice today?
Like I said, I’ve hesitated for years to share what I do… It’s not right for most people. But it is what I do.
If you’re an experienced investor and you think for yourself, then the right allocation might be some combination of the mainstream advice complemented with your own “opportunistic” allocations when truly exceptional opportunities appear.
This way, you are diversified, and you’re not mindlessly stuck in overpriced or dead-end investments, blindly following a rule of thumb.
Well, now you know what I do – opportunistic allocation. It’s not for everyone. It’s not for most people. But it works for me…
Source: Daily Wealth