Predicting the future: 27-July-2010

I am an engineer by training.   It is in my blood to try to engineer a investment solution that gives good upside performance while structurally limiting risk to reasonable levels (e.g., no greater than the upside opportunity).   A few years ago I concluded that I had not figured out a way to do this, and that it is probably impossible.

For example highly rated bonds, usually not considered the riskiest of investments, are sensitive to prevailing interest rates.  AGG, a bond ETF is currently yielding around 3.7% annualized interest.  Its duration, a term that defines the average time until maturity for the bonds in the fund is around 4.    The duration metric quantifies how sensitive a bond investment is to interest rate fluctuations.

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Dealing with risk — diversified asset allocation

Diversified asset allocation, the belief system that most investment advisors preach—has the “right”  mix of stocks, bonds, real estate, commodities spread out over the entire world.   This investor age dependent mix is rebalanced, typically quarterly, by reducing your investment in areas that have performed well and increasing your stake in areas that are now underweighted—presumably waiting their turn to perform.

I don’t think this is a bad strategy, but it does make the assumption that the future will be like the past (e.g., equities average around 10% growth per year over multi-decade periods, and that some assets classes like bonds and commodities tend to counterbalance trends in equities.

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Crash, bounce, or sideways — what’s next?

It’s 12:41AM Eastern time, 10-May-2010 and the Asian markets are up—evidently they are liking the central banks moves to shore up the Euro.   I think Greece’s days in the Euro camp are numbered—maybe 6 to 18 months.   The UK has shown that it is perfectly OK to be a member of the EU without being on the Euro, and I believe Germany and France …

Read moreCrash, bounce, or sideways — what’s next?