asset allocation

[jk]

I would like to initiate a discussion about applying the ideas discussed at itulip to the task of portfolio construction. If you want to put your money where your mouth is, where exactly do you put it? I will mention my own allocations and am interested in critiques and suggestions, as well as stimulating discussion of the underlying issues.

background- i am currently not using much leverage. in the early and mid 1980's i got my equity exposure with s&p contracts; a few years ago i was trading the gsci commodity index while hedging out part of its energy overweight with crude futures, but i want a more tranquil life these days. nonetheless, i am open to leveraged/commodity options or alternatives. i am not currently in any hedge funds, nor do i have any cta accounts. i run my own money. i've generated 12.3% compounded annually over the last 209 weeks with my greatest drawdown being 8%..


question 1. how much in precious metals and how to allocate within that area? I have 26% these days. Is this high or low? It's pretty conservative with 58% in gld, 15% in slv, 12% tgldx, 7% paas, 5% nem.

question 2 currencies? i have 22% nominal, but 35% with leverage. the leverage is in rywbx- 2 for 1 inverse dollar index, czj- 5 to 1 exposure to 5 asian currencies. the other antidollar positions have no leverage - gim, plmdx, pfbdx. in addition to the above i'm carrying 11% in canadian income trusts -- some energy specific, some broader. this investment has a lot of moving parts- currency, interest rate, business cycle, commodity. it has been my hope that these various parts will essentially cancel out and let the position generate income in about the 8% range in loonies which i expect to appreciate.

question 3. any exposure to equities? if so how and which? i have 30% in hsgfx. hussman did very well during the bear market a few years back, but is doing less well in recent years because he has been fully hedged most of the time, as well as investing in value and quality while the market has been rewarding flash and trash.

question 4. shorts? i have about 8% shorts as well as some long term put positions.

question 5. bonds? i have about 4% in 20 yr zeros and about 4% in a fund which is short junk bonds.

sense? nonsense?

[blazespinnaker]

Oersonally, I think that is a very risky and long term low growth portfolio. but others here will no doubt tell you otherwise. I always seem to be odd man out when investing, of course, but contrarian pays I think.

Contrarian is global investing, but not through etfs. Indexing (dumb money) is all the rage, so stay out of anything that is indexed.

Also, what is your time horizon? If you need access to all your funds in the next short little while (like I do) I can sort of see what you're trying to do and have some sympathy.

However, if you're just looking for reasonably good growth, then your portfolio seems needleslly risky.

I like bonds, but I am in a unique situation which is very unlikely to apply to anyone here.

I think a good portfolio is one which is nicely diversified in a way that an index is, but in equities which don't get a lot of index exposure. I'd go about half/half, global / us. I'd stay out of China / Japan / US and anything that is tied to the US economy.

If you can swing a solid portfolio like that, I'd probably go 50-70% equities depending on how happy you are with your choices. I'd put another 10-30% in bonds, depending on how much you put into equities, and then I'd throw the rest into precious metals.

I am looking into wheat commodities lately, because I've heard good things about them, but I have a feeling that there is a reason that they are priced so low.

[Jim Nickerson]

JK:

I cannot find any information on CZJ, can you point me to something that describes it?

thanks.



Jim

[Jim Nickerson]

9.93% URPIX
15.62% UCPIX
17.67% USPIX

1.06% DBC
3.21% CEF
3.01% SLV
2.93% OIH & XLE

2.91% RYWBX
1.31% FXE

6.20% RRPIX

36.12% CASH

Jim

[SeanO]

Great thread. I've bought in, but am struggling to figure out what to do.

I want to move a portion of my portfolio to PM's but not sure how to. The ETF's that JK suggests seem like the easy answer, but the sentiment Blaze echos with "stay out of anything indexed" has held me back. Blaze... can you suggest some alternatives. I'd extend this to commodites in general and equities too. Lack of intellect isn't the primary draw to indexing, it 's the lack of time. Depsite my best intentions, truly taking the time to research a nicely diversified portfolio never seems to happen. At the moment I'm still heavily weighted towards equities with a mix of index and global funds. Looking to change this immediately.

I'm also still heavily invested in real estate (see report from the front - housing correcting in nor cal), but am now more heavily weighted in commercial then residential. Commercial remains strong, especially as "smart" money moves out of residential and looks to 1031 exchange to something "safer". I expect this movement will result in some nice short term gains, followed by a similiar fate as predicted here for housing. Yes, it is a high-risk bet.

I don't get investing in bonds given the outlook here at iTulip. My simple understanding is that bond prices go down as interest rates go up. I suppose you can hold to maturity to get historically low returns, but there must be better alternatives. I currently hold no bonds. I also have no shorts, puts or currency positions. Primarily due to a lack of knowledge and comfort in these areas.

My largest investment is my time. I don't have sufficient capital to live on reasonable annualized returns, no matter how much time I spend to achieve them. Fortunately I'm a jack of all trades, and rode the tech and real estate bubbles nicely. So more than anything I'm most interested in where to spend my time. What industry's will benefit most from the events contemplated at iTulip?

[jk]

blaze: what are the risks you see in my portfolio?

i have no net equity exposure since my shorts hedge my canadian trusts.

you suggest a lot of equities, but i think that has enormous risk. i think there are high odds of another leg down in the u.s. markets that will bring down every other equity market in sympathy. yet you suggest so much in equities? obviously you are working from a different scenario. what is it?

also you talk about avoiding indexing, but the only index exposure is rywbx's inverse dollar index construction. usually indexing refers to equities and i have no such exposure. or was your reference to avoiding indexing a general remark about what to put in a portfolio? [in which case i wholeheartedly agree.]

the interesting thing about your comment is that i see my portfolio as very low risk. i'm concerned about the dollar so i have a fair amount of pm's and other currencies. on the other hand i'm concerned about equity market crashes and a possibility of deflation. in those scenarios i know hussman at least won't get killed, and my 30% exposure there will probably make money, and at least will maintain, so it's like cash in that scenario.

in general i use a scenario based approach. e.g. what are the odds of dollar diminution, how much of portfolio should i allocate to that, and what investment will respond positively in that environment? what are the odds of an equities crash and what will thrive? what are the odds of deflation? my zeroes will do well and my short junk bonds will also do well in that scenario.

so i see myself hedging a myriad of risks and think i'm using a mostly defensive approach. i understand, however, that some people will look at pm's and see great risk. i look at them and see defense against the debauching of the dollar.


re czj: if you email he'll email a prospectus. there's another similar instrument, caq, you might want to look at as well. they are both structured products from citibank. they are principal guaranteed to return $10/share at maturity in 2008. czj gives you 5:1 upside exposure to the singapore dollar, taiwan dollar, s. korean won, thai baht and indian rupee. it returns not the average but the sum of the changes in the 5 currencies. the only downside i can see is that if citibank blows up, your claim is that of an unsecured creditor. it's hard to imagine citi blowing up quite that badly.

[jk]

the system deleted the email i had posted.for czj and caq info

it's

clinton.clark@amex.com

[jk]

jim-
you are a man of strong convictions, and have the courage to carry them out! i've lost too much money over the years going short too early that i've become a little gun shy. that's why about half my shorts or just jan 07 or 08 leap puts and overall i'm not that short. i'm figuring that if equities tank it's pretty likely my precious metals will benefit [although they didn't in 2002 when the gold stocks went down with the market as a whole] i also figure that a flight to tbonds might help my zeroes and that my short junk bonds would benefit. but you'll make a lot more money than i if the market goes down in the next 2 quarters, as i and many others appear to expect.

blaze- re time horizon. i'm at a stage where my main concern is avoiding a big hit [including a big but slow hit by inflation].

[Jim Nickerson]

JK;

You wrote

i think there are high odds of another leg down in the u.s. markets that will bring down every other equity market in sympathy.

on the other hand i'm concerned about equity market crashes and a possibility of deflation. in those scenarios i know hussman at least won't get killed, and my 30% exposure there will probably make money, and at least will maintain, so it's like cash in that scenario.

I am not worried about a market crash, but if it does, and if you are really worried about it, then the easiet way (for me) to cover that possibility is to buy some of the bear mutual funds, the ones I listed US, UC, UR -PIX are all 200% inverse to the NDX, RUT, and SPX, but there are other less aggressive short funds.

I have gradually increased those positions since the middle of Jan. and I am down in them, but so far for the year I am up a fractional percent.

If you are really bearish and worried, put 5% in each of the -200% funds and
you will be equally hedged and have 15% in cash for something else or something more.

What I am worried about is that the equity markets don't go down, but take off again like 1999.

Jim

[Jim Nickerson]

JK;

What has it been, about 26 years since interest rates were in the clouds? So there has been a 26 year bear market in bonds. Almost everything I read, and perhaps I am really, truly reading the wrong things, suggests interest rates are going up over some longer period, and undoubtedly they will go up and down along the way. If that is true, then being long US gov't bonds of any ilk doesn't make sense to me.

What are good arguments that deflation will occur? I don't know any. I have read some, but they did not seem valid, so I guess I did not keep them in my brain.

I am not convinced the market is going down, but that is how I am betting at the moment and for some few past months, and I have been wrong, but what are the better odds, from where it is now ,of going up or going down?

Thank you for the info. on the CZJ AND CAQ.

I have been managing my investments about 20 years, and in no way am I a sophisticated investor, if that isn't already apparent. It sticks in my mind as some sort of dictum that the best hedge against inflation is to be long in the equity markets. If that continues to be true, assuming it was true, then it worries me that I am not long anything in equities, as least to any serious degree.

I guess if inflation by virtue of more money being put into the system, could fuel the equities to get back into a bubble like in 2000. That worries me, and the only protection I have is pick a stop loss point and get out if I hit it, then see what I think.

What you suggested as my "courage" was nice, but it could be my ignorance.




Jim

[jk]

jim
bonds have indeed for many years been rising in value as interest rates declined. under what i think are the most likely scenarios i think my tbond zeros will continue to lose value. that's why my position in them is small.

on the other hand i can imagine a deflationary scenario: the economy slows and people with debt up to their gills begin going bankrupt in large numbers. as the recession deepens monetary velocity slows down so much that the fed can't pump fast enough to compensate. daisy chain debt revulsion proceeds. in that scenario my tbonds will shine, and my short junk will also.

i don't invest based just on what i think is the most likely scenario, i try to take alternative possibilities into account.

i think if the equities markets tank there will be a flight to safety, which might benefit my tbonds, will benefit my short junkbonds, and might benefit my precious metals. i'm thinking that i'll also make more on my shorts and leap puts than i lost on my canadian income trusts which, after all, have some yield to protect them somewhat.

as for equities being a good hedge against inflation, i recall people saying that during the 70's but it didn't work out that way. equities travelled from 1000 in 1966 to 1000 in 1982 but lost something like 80% to inflation over that time.

although i think that the stock markets will go down, i'm also trying to account for the possibility of the huge sea of liquidity going back into the stock market as it leaves real estate. marc faber has written that he could see the dow hitting 36,000, like in that book. but he also says that in that scenario he sees gold hitting at least 6000.

[blazespinnaker]

Again, it depends on your time horizon. If you're looking at a short term investment (over the next year or maybe two) and needed your money out right away I can see why you'd go with the metals.

However, long term, your investment doesn't make sense historically. Equities have always provided the best return in the long run.

Bonds are very low risk / low return, but my thought is to purchase foreign bonds (I am buying euro/uk bonds). Yeah, that is even lower return, but there is some currency speculation in that as well.

I admit, my portfolio is pretty risky too, but these are crazy times.

That being said, of course, I am not an professional investment advisor so take everything I say with a grain of salt. My intention here is not to change your mind but rather inspire you to investigate your decisions further.

Quite possibly you might be right and I might be wrong, but I believe your portfolio requires significant due diligence and even professional analysis.

[blazespinnaker]

And don't forget modern portfolio theory, which I think your portfolio is missing. You need stuff that goes up when other parts of your portfolio go down. I see a lot of overweighting, which means you are exposed to a binary outcome: either up or down.

[blazespinnaker]

One last comment: the loonie tracks the USD. It may appreciate, but only slowly. If you want a good currency hedge, I'd go Euros.

[Jim Nickerson]

JK:

I appreciate your comments, and this is a great topic, and a great website.

All of this--your concerns and website's--seems to me to be about one main theme and that is not losing money when things go bad.

The first time I looked at the website there was already a discussion about actionable hedging. but I do not have the wherewithal to access it. It seems that since unknown experts are discussing hedging, it would add to everyone's knowledge to be able to access the forum.

I've considered why does anyone operate a site like this? It doesn't seem to be profit motivated, but rather it is an educational site, and as such it begs the question of why there is limited access to the actionalble hedging forum?

No one seems willing to tell what the rules are to access it.

Jim