By:Arch Pei
Compiler: Fund China

This year the asset management sector in the news a lot, However, I have the greatest interest in the “Wall Street Journal” reported a second-grade pupils American story He used the money to parents for investment, the establishment of a “lazy portfolio“, including three funds, and periodic re-balancing. June of this year, the lazy portfolio has been defeated three years in a row Standard & Poor’s 500 index each was about 270 basis points, the excess rate of return. Then its various media blitz of the reports.

To tell the truth, the students do not much of a miracle, because he used the “asset allocation” strategy, not put all their eggs in one basket. We all know that the investment portfolio theory, an investment portfolio included in the assets not related to the more its effectiveness on the higher, thus reducing risk or enhance returns. The pupils of the “lazy portfolio” includes three index funds — Vanguard U. S. Total Stock Market Index Fund, Vanguard All-world ex U. S. Stock Index Fund and the Vanguard Aggregate Bond Index Fund, which stocks and bonds is the ratio of 2 : 1. This means asset allocation is too brief, but are due to the index fund and have low costs, pay for the management fees might be only 0 .1-0.2%. If a second-grade primary school students can think of this asset allocation program, then anyone can.

The problem is that Most people do not know exactly or are unwilling to adopt such a simple asset allocation programs — they are too smart. too arrogant, that the index fund and distribution of the assets of only children games. Therefore, most investors are wallowing in the search for the “high-speed growth stocks” or “super-tick” Dreams, Two attempts by a successful investment, the need for a lifetime bankroll all of the money; or wallowing in the search for a Buffett and Peter-Lynch dream, attempt to find a market for 10 consecutive defeat in equity funds, and then put all the money thrown to. These people are too smart, and that is why they failed. As the transactions are too frequent and too reckless investment, and too follows the market trend, Most investors the performance of the market can not be defeated. Only buy three to five index funds, can already get much better results, but also do not have to spend any energy.

As early as 10 years ago, and scholars through data analysis, fund performance gap from the 90% distribution of the assets. I doubt the accuracy of this study, but for scholars of the main argument that the asset allocation is very important. Investment may be the most important thing. However, The next development was stunned — many investment banks and third-party research to institutional investors started with a very Details of the “asset allocation advice,” Asset Allocation analyst who is known as the “Strategist” They must each quarter distribution of the assets of a given program. Is asset allocation program should be quarterly or even monthly adjustments ready yet (and I do not mean the re-balance, but adjusting ingredients)? Even worse, “strategists” of the advice provided is getting smaller and more trivial, These include “Japan should be a real estate investment trust, which invested the amount of funding” and “Southeast Asian countries value shares value buying, “such a problem. In my view, these issues is not so much asset allocation, would not say industry study.

Moreover, the distribution of the assets of experts has gradually turned into a private shareholding companies and hedge funds, the “child care.” They believe that the traditional mutual funds, index funds and bonds can only provide market returns (Beta) excess return (Alpha) should be private equity funds, venture capital funds and hedge funds to visit. This is theoretically correct, but its practical significance has been grossly exaggerated. Consequently, if the institutional investors will not invest in hedge funds or complex structured derivatives, it seems too gentle on the. “Strategist” and the financial advisers who deliberately underestimating the private equity and hedge funds, the enormous risk, even encouraging ordinary individual investors (not those billionaires) have tried to these products. Now, the United States and Europe has produced some “similar hedge fund” mutual funds, They mostly use Long / Short and Market Neutral, Event Driven Arbitrage or 9-3 this strategy. They may not be greater than the risks of mutual funds generally much higher, the problem is difficult for investors to understand its risks, These can be “similar hedge fund” mutual funds appropriately into their existing investment portfolio.

Ultimately, I think the distribution of the assets is the basic principle of “simple”, the simple is not necessarily the best. But the general is the most effective. Asset allocation theory master Peter-Bernstein said : “If you have more than 20 types of asset types, it is only to find fun. “In fact, more than 10 species are a little excessive, because you bought the assets of the finer types, pay higher management fees. For the “broad-based market index fund” management fees generally below 0.25%. and the special “middle shares” or “small capitalization” index fund management fees in excess of this figure, Fund industry and the rate is still higher — iShares ETF management industry rate exceeds 0.4%. Since you trust asset allocation, then your investment cycle will not be too short. Why not choose the cheap and highly liquid assets, and assets must be broken down into many pieces? Some people say that this is a more accurate distribution of the assets, but not everyone needs a more precise configuration. Even institutional investors, the real need precise positioning of a particular industry, a certain style, it is only a minority.

Now, let us try to set up its own “lazy portfolio.” Very sorry, we can only use the American market financial tools to build this portfolio, Europe and the Asia-Pacific market of financial instruments such as the United States are not perfect. United States through the major fund companies, we can buy most of the world’s countries and regions in the types of asset. Here is what I do a pilot asset allocation portfolio.

U.S. stocks : 23% of the global market in the United States the share is 42%, Therefore, any effective investment portfolio is not an abandonment of the United States. However, the U.S. stock market current valuation is not high, but is not really very low, Therefore, we intend to test it in a lower weight, or 23%.

World stocks : 29.5% equities major world including Europe, Japan, Asia-Pacific, and four other markets, Apart from Europe, Japan and Canada, are “emerging market countries.” Emerging market stocks generally have a higher rate of return and risk. Generally speaking, the world is no cheaper stock market So for the world stock weights only lower 29.5%.

U.S. stocks and the world stock making a total of 52.5% occupied, it is interesting to our portfolio of all stocks. Not any more, because the world-wide bull market has lasted for quite a few years, from the price-earnings ratio, Reflection or dividend rate, however, the majority do not possess the particular stock investment value. A little more cautious, given stock only about half.

Investment-grade bonds : 19%, including bonds, and higher than the BBB grade corporate bonds and municipal bonds. Investment-grade bonds in a serious economic fluctuations give effective support, but also less risky. More important is that the bond market has been static yield comprehensive than the stock market, in other words, If macroeconomic growth momentum, and the bonds will be cost-effective than the stock business. For investment-grade bonds 20% share is reasonable.

Real estate mortgage securities : 12%, mainly MBS, it also includes some of ABS. Real estate mortgage securities market is a very broad, and it includes high-quality bonds, including low credit close to bankrupt bonds. In any case, it is in the securities market and the “hard assets” of a link between one of the investment portfolio to provide a certain degree of protection. Besides, now that the mortgage securities market has appeared to be a tendency to underestimate the situation and we do not imagine that bad. 12% is reasonable.

Commodity Futures : 16.5%, including oil, precious metals, basic metals, agricultural and livestock five major categories. Commodity Futures in history with the stock, bond markets have low correlation, and their risk return characteristics of a good, The only weak point is the management fees and transaction costs higher. Now, the Commodity Futures Index Fund launched for the provision of nearly a good commodity market channels. 16.5% the proportion seems to be too high, but worth a try.

Specific financial products purchased name :

Vanguard Total Stock Market ETF 23%
Vanguard FTSE All-World ex-US ETF 29.5%
iShares Lehman Aggregate Bond ETF 19%
JPMorgan Mortgage-Backed Securities Ultra Fund 12%
iShares S&P GSCI Commodity-Index ETF 16.5%

Apart from the above iShares GSCI ETF management fee is 0.75%, the rest are lower than 0.25%. Overall management of the rates should be around 0.25%. This is a very low cost of the combination. Perhaps after ten or twenty years, we can test the actual results, now need to wait patiently.

Copyright Fund China 2009.

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