Did quite a bit of reading yesterday. I'm pretty new to all this but have been learning quickly. The problem with the portfolio from fundadvice.com is that is has a high beta. Ray Dalio (CEO of Bridgewater, manages $150 dollars worth of assets) talks about what Barron is suggesting, using leverage to create an optimal portfolio.
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Mr. Dalio proposes to solve this problem using leverage with asset classes that have low correlation between them (think of the correlation matrix), but which have average returns that are too low to be of interest in meeting your 10% targeted average annual return without leverage. His point is that with leverage, you can increase the average rate of return of even low-return asset classes to the point that you can profitably include them in a portfolio with a targeted average return of 10%. The purpose of this is to be able to
exploit the diversification benefits of the very low correlations available in some low-return asset classes. This is an important strategy, but it is largely academic to most individual investors.
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Articles: (Post-Modern Portfolio Theory)
http://seekingalpha.com/article/2180...-for-your-risk
http://seekingalpha.com/article/5011...ur-risk-part-2
http://seekingalpha.com/article/2458...set-allocation
http://soundmoneytips.com/article/25...portable-alpha
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You can have a portfolio that is projected to a close to 1-to-1 ratio between expected return and standard deviation in return.
Any investor should be able to beat the S&P500 on an absolute and risk-adjusted basis by combining low-correlation assets
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Now I'm been looking into market neutral portfolios. It seems too good to be true? Instead of investing in indexes (that get rid of your unsystematic risk, but create a high beta and R^2) you invest into a few uncorrelated stocks. During 2000 - 2003 a portfolio like this would get 14% return and std dev is 14% as well. See link below:
http://seekingalpha.com/article/23986-th...ower-volatility
http://seekingalpha.com/article/19903-lo...-current-market