Asset Allocation 01 (Jun 09 - Jul 13)

[kennynah]

if one believes that the USD will lose much of its lustre over the years, given the excessive printing, then all commodities that are dollar-based will increase in price.

this includes gold and crude oil.... but one needs to recognize that such increase in price is not to be misunderstood as an increase in consumption of these commodities but rather it is a merely reflection of inflationary effects and the weakening of the dollar....

[b0rderc0llie]

My current cooking recipe now is:

Long
-----
Equities
Oil futures
Cattle futures
Lean Hog futures

Short
------
Stock index futures
Gold futures
Copper futures
Sugar futures
Cocoa futures

Am contemplating adding a short USD futures and a short bond futures to existing recipe.

[kennynah]

looks like you uncovered the secret of katong laksa recipe...yeehhaaaa....

[winston]

Diversification defined

Most people want to keep their stock investments spread over a variety of asset classes. The most common include:

Small caps, midcaps and large caps. These classifications indicate the capitalization, or the company's total value in the stock market. In general, small-cap companies are those with a market value of less than $1 billion; large-cap funds are worth roughly $8 billion or more. Larger companies tend to be more stable, while smaller companies often have more growth potential -- and more risk.

Growth and value. Growth stocks are those deemed to have the strongest long-term potential for growth. Value stocks are considered to be cheap and are attractive because of the possibility that their true value has yet to be realized. The risk with growth stocks is that growth may stall. The big risk with value stocks are that their true value isn't ever recognized or that a flaw in their businesses persists or gets worse.

Domestic and international. Sticking to companies based only in the U.S. means your portfolio's fate is closely tied to the ups and downs of the domestic economy. By putting assets overseas, you may benefit from stronger growth in other developed economies and from the often-supercharged growth of emerging markets such as China and Brazil. In some cases, the diverging paths of the world's economies helps smooth out the gains in a portfolio.

http://roadmaptoriches.moneycentral.msn ... ectionid=4

[iam802]

To me...>> Small cap, Growth stocks, Domestic/Intl.... all belong to the same asset class.

[winston]

To me...>> Small cap, Growth stocks, Domestic/Intl.... all belong to the same asset class.

Agreed. Yes, all should be lumped into "Equities".

[kennynah]

i agree too..

however, even within an asset class, there exists differentiation...eg, financial stocks vs retail stocks (sector risk), US stocks vs China stocks (country risk), growth stocks vs dividend stocks (opinion risk), high volatility vs low volatility stocks (volatility risk), etc...

imo, the fundamental purpose of asset allocation is to mitigate RISKS... ie, if i put all of my $3 capital into US financial stocks, then if terrorists concert bombing all of all american banks around the world, then my $3 will vanish...but if i put $1.50 into HSBC and 1.50 into JPM... perhaps, my HSBC's assets wont be affected by this event.

therefore, to be extremely diversified, one must not only split capital investments into different asset classes, one must also address the different risks within each asset class...

make sense ?

but with my $3, i don't have to worry about such intricate details...it is good for academic talk cock nia...

[LenaHuat]

Diversification or diworsification?
Charles Munger said : "Diversification is the hobgoblin of small minds with little confidence".
This prof said @MarketWatch

"Diversification has been sold as something that would prevent losses," added Meir Statman, a finance professor at the Santa Clara University in California. "That's nonsense. What diversification means is that if you divide your money between various assets, you will not have all of your money in the crummiest assets. You are in the middle, and in the middle doesn't mean it's going to be positive."

And I think he said that hedging is the way to prevent or minimize losses in last Sat's Biz Times.
IMHO, hedging merely restores one's position to a neutral position and so it doesn't mean it's going to be positive or asset-enhancing.

Same prof said :

The market's losses in 2008 shook the fundamentals of asset allocation. Stocks for the long run? Forget it. Too much in bonds? Not possible.

In fact, your mix of stocks, bonds, cash and alternative investments affects total return more than the individual investments you choose. Moreover, a portfolio that accurately reflects your ability to handle volatile market conditions will smooth your ride down Wall Street.

I subscribe to this view. I'm heavily invested in properties as I'm long on properties. When I sense a collapse of the equities market in 2007, I fully liquidated my equity portfolio and re-entered in March 2009. Asset allocation is the KEY to consistently good returns.

[winston]

Besides the normal Assets to allocate your money ie. Equities, Bonds, Cash, Properties and Commodities, there are also other areas that one can consider:-
1) Private Equity Funds
2) Hedge Funds ( Ha Ha )
3) IPOs
4) Seed Money for own business or those of friends and relatives
5) Short-Selling
6) Options ( favourite vehicle of kennynah )
7) Futures
8) Warrants
9) Currencies ( favourite vehicle of the Mrs Watanabes )
10) Commercial Properties
11) Collectibles eg. Arts, Antiques, Jewelleries etc.

[winston]

On CNBC now. Society Generale's Prediction for 2010: Anything but Cash

Ha Ha .. I'm going against the "experts" as I have the bulk of my portfolio in Cash