Let me reiterate that this is simply a conceptual exploration and the building blocks here include being a diligent saver, having a proper asset allocation, not being likely to take defensive action in the manner I write about so frequently and of course that after a big bull market it would make any sense to entertain this with that portfolio size. If a portfolio quadruples to $200,000 after a bull market then no soup for you.
It might be interesting to think about a scenario where there has been a bull market in global equities and an investor in global equities has two and half times what he had five or six years ago. What next? In the context of totally reworking the asset allocation to do away with normal stock market volatility I would think about the following segments to own;
- Global Equities
- Absolute Return
- Foreign Sovereign Debt
- Domestic Fixed Income
- Cash (foreign or otherwise)
As I mentioned the other day I like the idea in commodities of gold, broad based agriculture and then some single commodity (maybe an industrial metal or soft commodity) for this part of the portfolio. If someone were to go to 10% commodities I think this sort of mix would cover a lot of ground but some may want to add a second single commodity so maybe one industrial metal and one soft.
Absolute Return may be the most difficult piece of the puzzle because there are a lot of funds in this space but not all of them work. My ownership universe includes RYMFX, DLSAX and NARFX. I have plenty of faith in them to be sure but the allocations are all quite small in case something goes wrong at the fund or I just turn out to be wrong with them. If 15% makes sense here I think it could entail four or five funds in case one does something unexpected. I think the IndexIQ ETFs could work in this regard, as opposed to really being like hedge funds but we are years away from wondering whether a bull market is long in the tooth or not giving the entire space time to prove itself one way or another.
TIPS, either the real thing or funds, are easy to buy but the weighting depends on where the investor is; 60, healthy and wanting to work probably has different income needs than 68 and unable to work. Someone not needing the portfolio income can go heavier with TIPS and anyone needing the income would probably want more in regular bonds.
Foreign sovereigns are important, IMO, but very difficult to access. For now I believe minimum order size is $100,000, it is at Schwab anyway. There are plenty of funds in the space but it would be nice to be able to go a little narrow than the entire planet ex-US. I do believe this will become a little friendlier to retail investors in the next few years.
One thing that this exploration is not calling for is lazy portfolio. IMO any sort of portfolio needs to actively followed meaning staying in reasonable contact with the basics of any countries where you own equities or debt. Additionally I think owning any sort of mutual fund that is "supposed' to do something needs to be watched. This exploration is about how much volatility to take on after a very narrow outcome and then whether anything about such a narrow outcome can be applied more generally. As I believe in defensive action and very active following of holdings the idea doesn't hold much real world appeal but perhaps reiterates the importance of knowing that at times it makes sense to take on more vol and at other times less vol. No one can be right all the time but being cognizant of the concept is the start to adding a risk adjusted dynamic to your portfolio.