More On "Just Don't Lose It"

I wanted to delve a little further into the Just Don't Lose It cover story from this week's Barron's. The article included some sort of model portfolio that US Trust is apparently recommending to its clients. There were a couple of different things in there so this will focus on the "long term benchmark" which was as follows;

Cash 0%
US Large Cap 16%
US Mid Cap 7%
US Small Cap 4%
Developed Foreign 9%
Emerging Market 6%
US Investment Grade Debt 25%
Foreign Developed 2%
US High Yield 3%
Hedge Fund 12%
Private Equity 4%
Real Estate 6%
Tangible Assets 6%

Again the above is put forth by US Trust not me or my firm.

First is that there are a couple of things I would do differently. The way the numbers work out, US Trust is suggesting a little over 1/3 of the equity allocation go into foreign. In thinking about the long term and how things are evolving I would want more exposure to foreign equities (we have more exposure than this) and I would reiterate that the terms developed and emerging have become meaningless as many so called developed nations have banana republic-like debt loads.

I would also want more foreign exposure in the fixed income allocation, without going nuts. Some foreign exposure can help increase the yield of the portfolio. We love Aussie debt but we have a small allocation which does help the yield but we do not own so much that we are chasing yield. While I do not think the US Trust portfolio does chase yield, a lot of investors do and this usually ends badly for not having understood the risk taken ahead of time.

US Trust is suggesting more than 1/4 of the portfolio go into alternatives (it may not be right to characterize the RE that way, but the article did not clarify what they had in mind) which I think is way too much. US Trust caters to seriously wealthy people. I don't know if they have proprietary products in the above alternative category that they sell to clients or if they bring in outside products for clients but most of us will never have access to the next hedge fund that goes up 450% in one year because it shorted the right thing right before a panic of some sort. It is also unlikely that any of us will have access to the private equity fund that makes billions on, and sells just in the nick of time, the next bubble.

That is a long winded way of saying most people should be wary about these types of funds. On the other hand we can access plenty of exchange traded vehicles that effectively capture an absolute return result and offer a place to hide with part of the portfolio during bear market phases.

Just because I would want to do a couple of things differently than what US Trust offers above does not mean it is not a sophisticated portfolio (it might be or might not, you can decide for yourself). Anyone thinking it is sophisticated and wanting something very similar can get most of the way there with exchange traded products which supports the idea that ETPs are democratizing to a point. I would mention that Barron's also had an article which noted that hedge fund replicators don't really deliver hedge fund results--they can be good but hedge fund-like is probably unrealistic.

One last point is that the idea that the above is a "long term benchmark" is flawed in my opinion. I was taught that changing benchmarks is likely to result in chasing a previous winner. By having a long term benchmark with specific targets for different segments of the market sets a stage for impatience which ultimately leads to chasing heat. I think benchmarks should be very simple and easy to follow. The idea that mid caps should always be targeted at 7% seems ridiculous. I think someone may have used the word benchmark incorrectly. I think the above is a portfolio or maybe an asset allocation but not a benchmark.

As for the pictures; my brother got us courtside seats to the Washington State/Arizona State basketball game on Saturday afternoon. The seats were great and the game was exciting.