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September 29, 2008

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Kevin

This is a great explanation of a very counter-intuitive property: that a stock/bond allocation (say 90/10) actually has a higher expected return than a pure stock allocation. What you say about forced buying and selling is apt. An alternative way of seeing it is that the bonds make sure that always have money ready to buy stocks during low points (like right now). If you're interested you can find a mathematical explanation for all this in Gibson's "Asset Allocation".

Retired Syd

Kevin: Thanks for the book recommendation--I'm going to go get that one at the library. I'm reading "Irrational Exuberance" right now, which is giving me calm perspective into the markets right now. I'll take any help I can get in this regard right now!

RetiredAt47

Thanks so much for the mention! Rebalancing to maintain asset allocation is a wonderful thing. I wish I had done it a year ago, when I first decided I needed to change up my percentages a bit.

I'd love to hear your thoughts on "Irrational Exuberance" - I've not read that one yet and am always looking for a good read. I just learned about another book I've not read yet - "The Intelligent Asset Allocator". I'm trying to get it from the library.

Kevin

I almost recommended "The Intelligent Asset Allocator" over "Asset Allocation." They cover the same ground, and both are excellent. A.A. is longer and more technical, while T.I.A.A. is a more entertaining read. I think both are worth your time if you're interested in this stuff.

Bob Richards

your comments about tactical asset allocation are right on for a sound mutual fund portfolio. Here are the guidelines to make it work
1. decide on your asset classes in advance (you may want more than just bond or S&P)
2. rebalance at regular intervals (e.g. every year) and never touch your assets in between
3. add to your worst performer and harvest gains foerm your best performer. 99% of investors wont be able to do this unfortunately as their emotions will get in the way

Retired Syd

Bob: I agree 100%. I just chose S&P 500 and bonds to illustrate the point. My portfolio includes allocations to U.S. Stocks (large- mid- and small-cap) as well as foreign markets (both developed and emerging), and a small portion to REITS and commodoties, and of course bonds and cash. I use mostly index funds and ETF's and am rebalancing quarterly. Just did my 9/30 reallocation today, as hard as it was too look at!

Richard W.

I'm so glad I googled this topic. Interesting to see what various folks do with this allocation thing. I was reading today, a comment from Jack Bogle, founder of the giant Vanguard Group, that in order to insulate themselves from the crazy market today, they do two things. "First, allocate your assets intelligently. If you're in over your head, on margin, you have to get some of your money out of the stock market."
"Second, have your bond position equal to your age. If you're 70 years old and have 70% bonds in this market, you're not bad off. If you're in your 20s and 30s and 70% in stocks, you're going to be investing for decades." - This is from the marketwatch website today (10-21-08)

Like most investors today, I'm going through this allocation business trying to figure out what's best for me. I'm 65, so Mr. Bogle's comments really got my attention.

Retired Syd

@Richard W: It is a very interesting subject. I intend to read both books that were recommended by commenters above.

I think that rule of thumb you mention is a good place to start, and then go less or more depending on your own circumstances and risk tolerance--I'll be interested to see what these books have to say about that approach.

Thanks for stopping by!

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