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Asset Allocation ... 60% Stock/40% Bond Portfolio

Semi-Conservative Stock/Bond Portfolio

Let's take a closer look at this semi-conservative 60% stock and 40% 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 co

 

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.

60% Stock/40% Bonds Investor

Investor Bio:

Name: Michelle Johnson

Age: 54

Occupation: Marketing Consultant

Investment preferences: Stay the course with an equal weighting across stocks and bonds.

Family Status: Married to her husband an Executive VP. Together they have have one daughter age 22.

Risk Profile:

Similar weighting between preservation of capital and long-term growth; comfortable with stock markets volatility.

Financial Goals:

Pay graduate school expenses for their daughter.

Help support Michele's parents should they someday need living expenses.

Maintain current lifestyle in retirement.

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:
  • 60% Equities (30% Nasdaq, 20 MSCI World Index and 10% S&P 500 Index).
  • 40% Fixed-income mix (20% Lehman Brothers Aggregate Bond Index, 10% Corporate High Yield and 10% U.S. Government long-term bonds).
  • 52% Equities (24% Nasdaq, 20 MSCI World Index and 8% S&P 500 Index).
  • 38% Fixed-income mix (20% Lehman Brothers Aggregate Bond Index, 8% Corporate High Yield and 10% U.S. Government long-term bonds)
  • 10% Managed futures products.

Portfolio Overview:

A balanced portfolio is one that has a variety of investments. In the case of this portfolio our investor has true diversification within two asset classes; stocks and bonds. The next step is to add a degree diversification that serves two distinct purposes; added return and lower volatility. A managed futures product fits nicely into this portfolio mixture by reducing market exposure in the stock/bond asset classes and establish an investment in a third asset class; managed futures.

The overall investment objective here is to strengthen the portfolio through a balanced allocation approach. The current portfolio places too much emphasis in both the stock and bond sectors. By reducing exposure in each of these areas we can accumulate enough capital to invest in managed futures. Essential reducing the portfolio's domestic equity portion from 40% to 32% (24% Nasdaq and 8% S&P 500) and lowering the fixed income sector from 40% to 38% (20% Bond fund, 8% Corporate High Yield and 10% U.S long-term bonds) provides the 10% of capital necessary to invest in managed futures. The international equity sector (MSCI World Index) will not be adjusted to ensure proper asset class weightings. The final portfolio mixture creates a well-balanced portfolio hypothetically capable of generating greater profitability and lower month-end 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.

60% Stock/40% Bonds Investor

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

Current Portfolio
30% Nasdaq
10% S&P 500 Index
20% MSCI Wld. Index
20% LB Bond Index
10% Corp. High Yield
10% U.S. Bonds

Target Portfolio
24% Nasdaq
8% S&P 500 Index
20% MSCI Wld. Index
20% LB Bond Index
8% Corp. High Yield
10% U.S. Bonds
10% Managed Futures
Portfolio Adjustment
Compounded Annual Return:
9.93%
10.43%
5.04% Improvement in annualized profitability.
Annualized Std. Dev. Of Monthly ROR:
11.93%
10.29%
13.75% Decrease in annualized monthly volatility.
Sharpe Ratio:
0.66
0.82
24.24% Improvement to the portfolio's stability.
Average Monthly ROR:
0.89%
0.91%
2.25% Increase in monthly profitability.
Monthly Standard Deviation:
3.45%
2.97%
13.91% 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 4a:

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.