[jively]

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so, to sum, you use:

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

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REITs

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

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Are you talking about a thread here? What do you think the real return of commodities will be on average for the next 20-50 years?

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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.

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I don't really know what you mean by "risk space." Yes, the stock portion has a lot more risk than the fixed income portion. I go by the principle that the only purpose of fixed income is to reduce the risk of the entire portfolio. By using short and intermediate term only (no long bonds), and only high quality (no junk bonds), I am able to take more stock risk, using Int'l small stocks, EM small stocks, and so on, and have good risk-adjusted returns.

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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.

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

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I basically build my portfolios based on the academic research done by the folks affiliated with DFA: Fama, French, and so on. I think their thoughts are that there is no reason why commodities should have a positive return. Stocks have +EV because the companies are profitable and growing. Bonds have +EV because the issuer is paying interest for borrowing our money.

Commodities trade based on supply and demand. There is no profit, and no income. They probably will go up over time near the rate of inflation, but there are better investments to deal with that (like a 1-year bond fund).

It is true that commodities do have a low correlation with stocks and bonds, and that in the past, using them may improve the portfolio a little. We currently use 10% of the equity portion into REITs. If we swapped out commodities for a portion of that, we may get a little improvement, but I don't think it would be that significant.

As for leveraging short-term bonds or TIPS, do you have a history of returns to show that it is good to add to a portfolio? Is there a low-cost investment available to the average investor (meaning, not a hedge fund)?

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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.

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The Intl and EM stocks are not currency hedged. You can certainly try to show me research to the contrary, but I think the long-term EV of hedged or non-hedged international stocks should be about the same. However, by keeping them unhedged, there is much less correlation, so the overall portfolio has lower risk.

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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).

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Vanguard is good, and I recommend Vanguard for people on here that do not want to use an advisor. However, DFA's funds are generally better, because the small funds have greater exposure to small stocks, and value stocks have greater exposure to deep value. Plus, intl small, intl small value, EM value, and EM small are not readily available at Vanguard.

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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.

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Not really sure what you are using here with .3, .5... Expected return / SD? Sharpe ratio?

-Tom