[DcifrThs]

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sounds like typical FA rhetoric from what i've heard. can you please list the asset classes you use to meet your clients goals?

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US stocks (tilting toward small and value stocks)
(Developed) International stocks (tilting toward small and value stocks)
Emerging Market stocks (tilting toward small and value stocks)
Real estate stocks - US and international
Short-term bonds (high quality, US and currency-hedged international)
Intermediate-term bonds (high quality, US and currency-hedged international)
Money market funds

-Tom

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so, to sum, you use:

-Stocks
-Bonds
-Cash
-Real estate stocks (as in REITs or companies that RE cenetered??)

this is why i asked. in the discussion about the real return of commodities, i noted that institutional investors move slowly.

additionally, financial advisors move slowly for a number of reasons that also relate to institutional investors. commodities seem riskier to ivnestors and many investors are very tied to their advisors. if their advisors recommend something that doesn't work out in the short term, they may risk losing that relationship (and that asset base). so peer group risk also applies to them, but in a more direct way.

the above portfolio, no matter how you structure it (i.e. one that has access to real estate, stocks, bonds, and cash) is not optimal for long term investing.

it is mostly geared towards economic environments that favor stocks. especially when you consider that (and i'm guessing here), the financial advisor's clients are far more likely to have a majority of their CAPITAL in stocks. consider that a 50% capital allocation to stocks w/ a 50% allocation to bonds actually means your portfolio is about 75-90% stocks in risk space.

additionally, small commodity allocations and leverage (for TIPS and other S-T nominal bond allocations to bring them to the same risk level as equities) is simply not used.

i'm not saying that you SHOULD use them (clients have different tastes etc.), but it does go to show that the premium achieved (in terms of risk adjusted returns) from diversification and leverage is a long time in dilution from retail & institutional investors.

these additions would significantly improve your (and your client's) risk adjusted returns.

one additional question (are you developed & emerging mkt international ) stock allocations hedged for currency risk?

if not, that is another area where your (and your client's) risk adjusted returns are being hampered by being exposed to risk while not being compensated for it, thus lowering your risk adjsuted returns. i think it is also very funny that the int'l bond allocations you mentioned ARE hedged, though the risk coming from hedging that allocation is far smaller than from your int'l stock allocations both a) because the stock allocations are likely far larger, and b) because the stock allocations are definitely way more risky.

note i'm not blaming you, or saying you should do your job in any other way (since if i were a financial advisor, i'd operate the same way), i'm just saying the non-optimal investment practices leave a ton on the table for anybody willing to capture the diversification, leverage, and intelligent hedging premiums to risk adjusted returns that are available.

again, while it is important to note the role that you serve (clients wouldn't be able to structure a portfolio you provide them by any stretch and therefore you provide value to them), that role could be even greater if investors would clammor for it or if you would lead the way. the latter is even less likely though than the former due to peer risk and client aversion to it at the present.

so while financial advisors tout their "diversification," (even though their clients may be better off than they woudl be without them), it is clear that a similar portfolio can be constructed via vanguard with a small amount of effort (and without the fees). these stock based portfolios though likely have risk adjusted returns around .30 vs. the acheivable # of around .4 (with more diversification and hedging) and .5-.7 with intelligent use of leverage and full diversification.

index funds via vanguard or other index providers would do just as well.

fortunately for financial advisors though, the absolutely massive majority of people don't understand portfolio construction so the game is not zero sum (clients gain from being far more well invested than they would be otherwise, and advisors gain in that they have a living)

sorry for the off-topic rant, but i did want to tie it back to how slowly investors move into things that would benefit them a ton. and this is just another reason why i'd expect real returns from commodity exposures for the next at least 20-50 years.

Barron