Recently, a family member of one of our portfolio managers asked for some investment advice. This person had a sum of money and they wanted some guidance on what they should buy. Keep in mind that this is a slightly different question than we typically receive. This family member was looking for a complete asset allocation, whereas most of the work that we do here involves building strategies that are used as pieces of the overall portfolio. For example, we most frequently interact with financial advisors who are making decisions about how our strategies might fit into the overall allocation that they are building for their clients.
When faced with a question like this a couple things become apparent. First, the ETF has changed (for a good way) asset allocation. Liquidity, low costs, transparency, potential tax efficiency, access to Smart Beta…all these things have been dramatically improved by the expansion of the ETF universe over the past decade. Second, the fact that strategies are wrapped in ETFs minimizes the need for trading and allocation changes. We’ve come a long way from the days when ETFs just gave you cheap access to cap-weighted indexes. Now, global tactical asset allocation strategies can be easily accessed in an ETF structure. There is no need to trade in and out of a strategy like that because those changes are taking place on an index level.
So, here is the allocation that John provided for this family member:
- 25% in low cost exposure to U.S. Treasurys
- 25% in a Global Tactical Asset Allocation strategy that uses relative strength to dynamically allocate among U.S. equities, International Equities, Inverse Equities, Currencies, Commodities, Fixed Income, and Real Estate
- 12% to U.S. mid and large cap momentum stocks
- 12% to U.S. large cap value stocks
- 6% to U.S. large cap low volatility stocks
- 5% to U.S. cap-weighted small cap stocks
- 5% to U.S. small cap momentum stocks
- 10% to a relative strength-based International rotation strategy
Check in and rebalance every couple years and I think this is an allocation that can successfuly take an investor through the next several decades. Are there alternative allocations that also make sense? Of course. That is where the art comes in. However, with this allocation I see a diversified portfolio built on principles that have stood the test of time: Diversification between U.S. equities, International equities, and Fixed Income. The ability to have meaningful exposure to alternatives such as Commodities, Real Estate, Currencies, and Inverse equities when they are in favor. And mixing the Smart Beta strategies of Momentum, Value, and Low Volatility.
With better tools advisors can build better allocations, and we believe that the allocation above employs some of the very best and blends them together in a way that we believe will be very effective over time.
Dorsey Wright is the index provider for PDP, DWAS, and IFV. Dorsey Wright is the signal provider for DWAT. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. An investor should consult with a financial advisor and read the prospectuses before considering any of the above strategies. This example is presented for illustrative purposes only and does not represent a past recommendation. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.