Investment allocation survey

Let’s say that you receive a lump sum of cash today, and you want to invest it in various things. What do you buy and in what allocation? Guidelines:

  1. You want to assign investments to categories, for instance “US small cap stocks” or “Commodities”, not single assets. Sectors, like “European Real Estate”, are ok.

  2. Long term investment horizon.

  3. You want to invest all the money, not spend some of it on cigars, strippers, etc. (Sorry, certain people on AF. You know who you are…)

Reasons for your allocation are also encouraged - i.e. if you have genius insight, please do not be shy.

Let’s say I have a friend who wants to make some investments soon. Thanks for responses.

Ohai, is #3 important if you cannot find anything to buy? Cash is my default asset allocation until I can find companies trading at a discount to what I think they are worth. If I can find 6 companies that meet this criteria I will probably be fully-invested. If I cannot find any, I will be fully-invested in cash.

I also don’t view commodities as an asset class since they do not produce any cash flow. Given the runup in commodities I would be very careful about putting much capital into that area. I would also stay away from a lot of the REITs that have been bid up by people chasing yield. If I had to put my money to work today it would be in the blue chip dividend paying companies. I believe 11 of the Dow 30 are yielding 3% or higher.

I have been looking at buying foreclosed homes in Phoenix until the stock market presents some buying opportunities. The problem with homes is that they take some time to sell so it’s not like I could just hit the sell button and generate some cash when stocks get cheap again.

My default allocation is the Permanent Portfolio instead of cash… (25% S&P500, 25% LT Treasuries, 25% Gold, 25% Cash)… until I learn more and have a better investment intuition, that’s what I’m sticking with… not the most perfect plan but at least it’s safer than 100% cash (which assumes inflation won’t be a problem in the future.)

25% in LT treasuries and 25% in gold may have more risks that you think. If inflation does spike then your treasuries will get killed and if deflation hits your gold will likely get killed. Just my $.02.

It’s a bit counterintuitive but on the surface, this portfolio seems to expose yourself to a lot of vulnerabilities. But in practice, some component will usually spike in some sort of economic shock (i.e. gold in the 1973 oil shock, LT treasuries in the 2008 crisis… these were both positive years for such a portfolio but there’s obviously no guarantee it’ll remain above water in future crisis years.)

If I knew in hindsight there’s a 100% chance for hyperinflation or deflation in the future, I would go 100% gold or 100% treasuries respectively. However, I do not have any idea and nor do even the smartest people, so I prefer to take a completely neutral view in my investments.

That doesn’t mean this portfolio is bullet-proof. Since we’re owning all the major asset classes, we’ll see money flow from one asset to another whenever the economy turns for good or for bad. If money stops flowing into the financial system, there could be a net outflow from all the assets. But I can’t see that circumstance dealing a more fatal blow to one’s net worth than positioning one’s portfolio on the wrong economic circumstance (expecting a boom or inflation when in reality we have a recession.) And until I gain a better sense at forecasting economic cycles, I’d rather position myself neutrally.

I welcome any other fairly knowledgable members to take a good critique at such a plan…

Sounds like the gold and the treasuries are negatively correlated - to the extent that inflation is a risk. That makes the portfolio less risky than it looks. Of course 25% and 25% might not be the right quantities to have those risks offset each other.

The permanent portfolio seems sensible to me. It could probably be improved upon with more attention to the weightings, but as a cash-substitute, I think it makes a lot of sense. Investment ideas are supposed to outperform the market, so why not have some market exposure while you are waiting for new pitches. It generates more return than cash. You don’t necessarily want a lot of market exposure while waiting for ideas, because some opportunities come from bottom feeding after a market crash, so you definitely want dry powder for those cases. But market crashes - though more common than statistically expected - still aren’t all that common, so some market exposure can be prudent while you’re waiting for good ideas.

Is there an ETF that does the permanent portfolio? It would be a lot easier than managing the balance on one’s own, and probably cheaper in terms of transaction costs.

There’s a mutual fund version of the permanent portfolio (PRPFX)

And an ETF that was recently launched: PERM

I personally just buy 25% SPY, 25% TLT, 25% GLD, and 25% SHY then rebalance whenever any component’s weight goes >30% or <20%.

How big is your pot? If you’ve got $100 million or more then I think you should be investing in a portfolio of closed-end private equity style funds. PE has outperformed all other asset classes over the past 30 years and if you choose a selection of good quality managers, I would expect it to continue to do so.

The Yale endowment has over 50% allocated to closed-end funds between its PE and Real Estate holdings. It’s a model I like a lot.

Yale has a target allocation of 16% to public equities and 4% to bonds by the way. David Swensen is anything but orthodox.

where is your data set saying PE outperformed? I have read PE underperformed.

I disagree with the assessment that if you got a lot of money, you need to be in PE funds to do well.

Yale and the associated funds that got in the PE funds were the pioneers in terms of alternative investing in a major way. Those who tried to immulate their style took a beating…

Well industry wide figures are notoriously hard to come by in PE as most GPs don’t disclose their returns publicly.

Cambridge Associates do publish the following estimate of returns:

https://www.cambridgeassociates.com/pdf/Private%20Equity%20Index.pdf

The fund I work at has an allocation to private equity built up over the last decade and the returns we’ve seen over the 5-10 year timeframe would be in line with that index.

Dispersion of returns is huge in PE, so LP performance will vary greatly depending on their manager selection. Yale seem to have been particularly good in picking outperforming managers, especially on the real estate side.

While there is plenty of literaturse argued that PE is essentially illiquidty premium, I think the most important thing for PE is market timing. They can always float the business in desireable market condition. If by the end of the harvest period, the good time hasn’t come they can ask for 2 years extension.Yale/Harvard are the pioneer in this segment and they have long standing relationships with top GPs that not many people can replicate. Another thing about PE is the conssitency of return i.e. a good fund likely to outperform in the next fund. Good managers are normally 2x over-subscribed…with no connection, you can’t even put money with them.

Re Asset Allocation, I have EM debt and equities, High yield that’s enough for my credit risk. Cash and long duration bond for “a bit of safe haven”. CTA/managed future as hedge and limited allocation to illiquid strategies. This is paper portfolio I build to be used in my next interview. Work-related portfolio is heaps different, more illiquid assets than my liking…