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

Conservative Stock/Bond Portfolio

Let's take a closer look at this conservative 25% stock and 75% 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 story.

 

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.

25% Stock/75% Bond Investor

Investor Bio:

Name: Tom Anderson

Age: 67

Occupation: Retired Surgeon

Investment preferences: maintain a conservative approach to investing with a large portion of the portfolio comprised of fixed income assets.

Family Status: Married to his second wife. Together they have four grown children from previous marriages and a total of six grand children.

Risk Profile:

Risk averse; preservation of capital is the primary concern.

Financial Goals:

Maintain comfortable lifestyle through retirement.

Provide children with an annual tax exempt gift.

Assist with the college education expenses for all six grand children.

Investment Objective:

Preservation of capital is the most import objective for the portfolio.

Lower the volatility associated with the portfolio while attempting to increase the annual return.

Further diversify the portfolio's asset holding to ensure as best as possible a strong non-correlated performance capable of weathering a variety of market environments.

Current Portfolio:

Target Portfolio:

Current Portfolio: Target Portfolio:
  • 25% Domestic Stocks (12.5% Dow Jones, 12.5% S&P 500).
  • 75% Fixed-income mix (45% Lehman Brothers Aggregate Bond Index, 15% High yield and 15% U.S. Government long-term bonds).
  • 20% Domestic Stocks (10% Dow Jones, 10% S&P 500).
  • 70% Fixed-income mix (45% Lehman Brothers Aggregate Bond Index, 12.5% High yield and 12.5% U.S. Government long-term bonds)
  • 10% Managed futures products.

Portfolio Overview:

Preservation of capital is the focus of this portfolio. An intelligent well-balanced portfolio must have a variety of asset classes. A portfolio with an asset breakdown of 25% stocks and 75% bonds has more than enough room to allocate a small portion of capital to managed futures. It may surprise some investors, but adding appropriate managed futures product into a conservative portfolio can hypothetically stabilize returns and improve the bottom line.

The key here is adding a non-correlated asset class into the mixture to strengthen the underlying portfolio. By simple reallocating the portfolio's equity and bond holding a new and further diversified portfolio can emerge. By slightly reducing the equity portion from 25% to 20% (10% Dow Jones and 10% S&P 500) and the bond portion from 75% to 70% (45% Bond fund, 12.5% Corporate High Yield and 12.5% U.S long-term bonds) provides the 10% of capital necessary to invest in managed futures. The addition of a third asset class, like managed futures, can have an immediate effect on this traditional well-balanced conservative portfolio.


>>> 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.

25% Stock/75% Bond Investor

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

Current Portfolio
12.5% Dow Jones
12.5% S&P 500 Index
45% LB Bond Index
15% Corp. H. Yield
15% U.S. Bonds

Target Portfolio
10% Dow Jones
10% S&P 500 Index
45% LB BondIndex
12.5% Corp. H. Yield
12.5% U.S. Bonds
10% Managed Futures
Portfolio Adjustment
Compounded Annual Return:
9.97%
10.41%
4.41% Improvement in annualized profitability.
Annualized Std. Dev. Of Monthly ROR:
6.22%
5.68%
 8.68% Decrease in annualized monthly volatility.
Sharpe Ratio:
1.28
1.48
15.63% Improvement to the portfolio's stability.
Average Monthly ROR:
0.82%
0.85%
3.66% Increase in monthly profitability.
Monthly Standard Deviation:
1.80%
1.64%
8.89% 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 5a:

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.