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Asset Allocation ... 75% Stock/25% Bond Portfolio

Semi-Aggressive Stock/Bond Portfolio

Let's take a closer look at this semi-aggressive 75% stock and 25% bond investment portfolio and adjust the asset class allocation to potentially improve returns while lowering specific risk measures. Click on the following links for the complete

 

COMMODITY TRADING INVOLVES SUBSTANTIAL RISKS DUE IN PART TO THE HIGHLY SPECULATIVE NATURE OF SUCH TRADING. AS A RESULT, AN INVESTMENT IN A COMMODITY TRADING ACCOUNT IS ONLY SUITABLE FOR YOU IF YOU HAVE ADEQUATE MEANS TO PROVIDE FOR YOUR CURRENT NEEDS AND PERSONAL CONTINGENCIES AND YOU CAN BEAR THE ECONOMIC RISK OF LOSING YOUR ENTIRE INVESTMENT.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

75% Stock/25% Bond Investor

Investor Bio:

Name: Jack Pender

Age: 32

Occupation: Lawyer.

Investment preferences: Invest heavily in stocks mainly equity mutual funds. He wants to ensure some degree of balance so he invests in bond funds to round out the portfolio.

Family Status: Married to his wife, a stay at home mother, with two small children ages 5 and 3.

Risk Profile:

Semi-aggressive equity investor who is comfortable with stock market volatility.


Financial Goals:

Maintain emergency funds to cover three months of household expenses.

Pay college expenses for both children (public or private).

Retire between the ages of 55 and 60.

Investment Objective:

Lower the volatility associated with the portfolio's monthly returns.

Increase the compounded annual return.

Further diversify the asset holding within the portfolio.

 

Current Portfolio:

Target Portfolio:

Current Portfolio: Target Portfolio:
  • 75% Domestic Equities (50% Nasdaq and 25% S&P 500 Index).
  • 25% General Bond Fund (Lehman Brothers Aggregate Bond Index).
  • 55% Domestic Equities (35% Nasdaq and 20% S&P 500 Index).
  • 25% General Bond Fund (Lehman Brothers Aggregate Bond Index).
  • 20% Managed futures products.

Portfolio Overview:

In general the current portfolio provides the investor with a degree of diversification. Assets are allocated across stocks and bonds in a mode appropriate for an investor with a young family. The largest portion of capital is directed to the stock market with a greater emphasis on the Nasdaq index. Although most investor view Nasdaq orientated stocks as a good long-term investment this index can at times be quite volatile. Case in point, the 75% drawdown experienced by the Nasdaq from the highs set in 2000.

The key here is to maintain the general make-up of the portfolio but redirect capital from the aggressive stock portion of the portfolio to managed futures products. By reducing the portfolio's equity portion from 75% to 55% (35% Nasdaq and 20% S&P 500) allows 20% of capital to be invested in managed futures. The bond portion of the portfolio will not be adjusted to ensure proper asset class weightings. The end result provides our investor hypothetically with greater profitability and lower portfolio volatility.

>>> Click for a complete portfolio comparison of trading performance.


Performance Comparison:

This section provides an historic comparison between the current portfolio and target portfolio which includes Managed Futures products. The test period for this evaluation runs from January 1985 - April 2003 for a total of over 200 months. The net improvement to the target portfolio was an increase in return and a reduction to annualized monthly volatility. The portfolio adjustment column, in the table below, reflects the true percentage improvement made in each of the portfolios risk and reward measurers.

75% Stock/25% Bond Investor

Portfolio Comparison: Test Period 1/85 - 4/03 (202 months of data)
 

Current Portfolio
50% Nasdaq
25% S&P 500
25% LB Bond Index

Target Portfolio
35% Nasdaq
20% S&P 500
25% LB Bond Index
20% Managed Futures
Portfolio Adjustment
Compounded Annual Return:
9.76%
10.72%
9.84% Improvement in annualized profitability.
Annualized Std. Dev. Of Monthly ROR:
15.89%
11.83%
25.55% Decrease in annualized monthly volatility.
Sharpe Ratio:
0.49
0.74
51.02% Improvement to the portfolio's stability.
Average Monthly ROR:
0.91%
0.94%
3.30% Increase in monthly profitability.
Monthly Standard Deviation:
4.59%
3.42%
25.49% Decrease in monthly volatility.

The chart below illustrates the effect true diversification can have on a portfolio. Adding Managed Futures products into the portfolio mixture improved our target portfolio by increasing profitability (Compounded Annual Return) and lowering volatility (Annualized Std. Dev. Of Monthly ROR). It's the best of both worlds; more reward with less risk.

Chart 2a:

COMMODITY TRADING INVOLVES SUBSTANTIAL RISKS DUE IN PART TO THE HIGHLY SPECULATIVE NATURE OF SUCH TRADING. AS A RESULT, AN INVESTMENT IN A COMMODITY TRADING ACCOUNT IS ONLY SUITABLE FOR YOU IF YOU HAVE ADEQUATE MEANS TO PROVIDE FOR YOUR CURRENT NEEDS AND PERSONAL CONTINGENCIES AND YOU CAN BEAR THE ECONOMIC RISK OF LOSING YOUR ENTIRE INVESTMENT.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

>>> Click to review other asset allocation portfolios.