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Finding The Right Balance With New Asset Allocation Motifs

28 February 2014 in Trading Ideas

Last year, we unveiled several asset-allocation motifs for investors looking for more balanced-portfolio options.

Now, we’re back with four more additions.

Perhaps the biggest concept behind the asset-allocation investing model is simplicity. While there are variations on the original theme, the basic idea is a mixture of securities ranging from domestic and international stocks, government and corporate bonds, REITs, commodities, and short-term fixed income, which can allow you to combine investments in such a way that risks, inherent in any one of them, can be balanced by assets that may move in different market cycles or respond to different factors.

Plus, there’s the absence of trying to time market performance by aligning yourself with the flavor-of-the-month investments. Over a longer-time duration, different asset classes can rotate in terms of outperformance or underperformance, meaning that your portfolio could be structured to seek to have a portion of your overall portfolio in sync with prevailing market leaders.

If asset-allocation investing sounds compelling, consider these four new alternatives within the context of your financial situation, goals and risk tolerance. Motif utilizes ETFs with strategies in large and small cap stocks, long-term corporate bonds, t-bills, REITs, commodities, and international stocks to create portfolios of securities that fit within the following asset allocation themes:

Classic 60/40: This original bread-and-butter mix of 60% stocks and 40% bonds has stood the test of time. Even better — over a 40-year-stretch from 1969-2009, a 60/40 index portfolio delivered just 2% lower returns than a 100% stock portfolio, but with 40% less volatility.1

Lazy 3 Portfolio: This motif offers just a slight tweak to the original 60/40, calling for a three-pronged portfolio: ETFs with strategies in domestic stocks, international stocks and bonds.

New Era Portfolio: A brainchild of former PIMCO CEO Mohamed El-Arian, this motif calls for higher exposure to international assets to reflect a global economy that is notably less US-focused – only one-third of the portfolio’s equity allocation is to ETFs focused on US stocks. In addition, El-Arian suggests holding real assets such as real estate and commodities to provide an inflation hedge.

No Brainer Portfolio: Financial theorist William Bernstein found that rebalancing a simple asset-allocation portfolio could capture excess returns that resulted from asset class volatility and correlation returns. This motif identifies ETFs in an attempt to replicate Bernstein’s model of a four-asset-class structure: the total US stock market, small-cap US stocks, international stocks, and US corporate bonds.

Explore all the asset allocation motifs now.

1David Waring, “Is the 60/40 Rule All Investors Need to Know?” Learnbonds.com, July 2012, http://www.learnbonds.com/the-60-40-rule-of-investing/ (accessed Feb. 26, 2014).

The Exchange Traded Funds prospectus contains its investment objectives, risks, charges, expenses and other important information you should read and consider carefully prior to making an investment decision. Please review the current prospectus, available from the Prospectus link.

ETFs have unique features that you should be aware of, which can include distribution of any gains, risks related to securities within the portfolio, and tax consequences. The data quoted herein represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that your investment, when redeemed, may be worth more or less than their original value. Current performance may be lower or higher than the performance data provided. Please review the prospectus or other research tools provided on this site for more recent performance information.

Fixed income investments are subject to various unique risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Investing in securities involves risk, including the possible loss of principal; individual investments or a collection of individual stocks such as motifs which are concentrated in an idea or theme may face increased risk of price fluctuation over more diversified holdings due to adverse developments within a particular industry or sector.

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