Conference nyoss1::market_investing

    
    >> asset allocation models are designed to keep rich people rich & keep
    >> them from suing their brokers.
    
    Nope.  Asset allocation models are designed to maximize return for a
    given level of and aversion towards risk.  These models are based on
    the covariances between the asset classes you're considering, as well
    as the estimated return and standard deviation of the asset over the
    holding period you're interested in.
    
    Granted, you get less return than an investor who is willing to take on
    more risk... but if borrowing is permitted (i.e. investing on margin),
    then you can construct a portfolio with lower risk that has the same
    return as a less diversified portfolio.
    
    An interesting (?) result is that prudent portfolio management requires
    that you make estimates about the futre (a.k.a. market timing); even
    the "bogey" assumption that the average return of the past n years is
    the best estimate for the next holding period is a market timing
    estimate.
    
    Another interesting result is that asset allocated portfilios can and
    often do outperform diversified stock portfolios.
    

    re. 1  
    can you give me a specific example over a 3/5/10 year period where a 
    particular return on investment for an asset allocation fund
    outperformed that of a growth stock fund for the same period?
    
    
    /m

    
    re: 3/5/10 year period
    
        let's consider a 1-year period first.  Virtually any bear year will
    result in better performance in relative terms for a hedged portfolio. 
    That, after all, is the motivation for hedging.
    
        the past 10 years have been one of the greatest bull markets in
    history... but let history be your guide rather than the past 10 years.
    
        hedge funds, I understand, have earned around 15%+ consistently
    throughout the 1980's (I don't have hard data on this; it is based on
    remarks that I've read in Barron's but have not personally attempted to
    verify).  Note that you may not legally invest in these funds unless you 
    have a large amount of money (see the lead article in Barron's of 2 weeks
    ago, for instance)... there are laws which prohibit most garden variety 
    mutual funds from selling short.  Note that the advantage to these
    funds is that they continue to perform well even in the absence of a
    historic bull market.
    
       A hedge fund is just an unconstrained case of an asset allocation
    fund.  If you set up your own portfolio, you can of course borrow
    and/or short anything you like (except maybe S&P future$$$), and 
    therefore you can create your own mini- hedge fund.  You can in principle
    enjoy the same relatively high/stable returns as a hedge fund if you have 
    enough money to diversify your portfolio adequately and you're willing
    to put in the necessary (and considerable) research effort.
    
       good luck,
    
    	   /Jim
    
    fund.

    (for the purposes of protecting the privacy of this employee I have
    entered this note without the identity of the author.  Mail sent to me
    regarding this reply can be forwarded to the author.)
    
    
One of the hardest things for me since I've been "managing my own money"
has been asset allocation and creating an investment model.  I subscribe to
Sheldon Jacobs' monthly newsletter, "The No-Load Fund Investor", read Smart
Money, Money, WSJ, and Morningstar Reports to track opinions  on the funds
I have invested in. 

Some facts:

I'd like to retire within the next 8-10 years
I fully fund the 401K plan at work
I contribute 2K a year to an IRA

Based roughly on Sheldon Jacobs' model portfolios in his newsletter, I 
constructed my own portfolio (based on my risk tolerance and years till
retirement). 

As I get within 5 years or so of retirement I plan to move more into   
bond/fixed-income funds, to a  25-30% weighting. However, the allocation
now looks like this: 


65% equities

   - Growth           20%
   - Growth/Income    20%
   - Income           20%
   - Aggressive Growth  5%

20% International

10% Bonds

 5% Cash

********************************************************************************
Specifically, the breakdown of funds (with % of total portfolio) is:

Equities:

Fidelity Asset Manager      4%
Fidelity Blue Chip	    4%
Fidelity Growth & Income    16% (1/2 in IRA)
Fidelity Puritan	    14% (all in IRA)
Fidelity Select Health	     1%
Vanguard Inst. Index	     2% (401K)
Vanguard Windsor	     7% (401K)
Banker's Trust Russell 2000  5% (401K)
Dreyfus Third Century	     9%
Digital Stock		     3%

******************************

International:

T. Rowe Price Intl. Stock   10%
T. Rowe Price New Asia	    10%

******************************

Bonds:

MA Transport Municipal Bonds 7%
T. Rowe Price Spectrum Inc.  3%

******************************

Cash

Fidelity Cash Reserves	      5%


While I realize that some of the funds I own have loads outside of IRA
accounts (Blue Chip, Growth & Income), I do not plan to make any additional
investments to any loaded funds.  I'll buy similar no-load funds when I add
to investments in those categories.   Also, all of the mutual funds I own
are recommended as "buys" in the newsletter.

I realize that Dreyfus Third Century has had almost two years of sub-par
performance, so I was thinking of switching it to the Peoples' S & P MidCAP
Index fund (also recommended).  I was also considering Gabelli Asset fund
or Oakmark for the switch.

o  Any comments on the mix and/or funds I have chosen (or am thinking 
   about)?

o  If I switched Dreyfus Third Century to the Dreyfus Midcap Index fund,
   is having over 15% of a  portfolio in index funds (broken up between
   small,  mid, and large cap) a wise thing?  


I'll appreciate any comments/suggestions.

Focus On... 1994
      - Kylelane Purcell, Morningstar 5-Star Investor, February 1994


In 1994, Diversification May Save 1993's Profits

   Investors of all stripes made out like bandits in 1993, but the greatest 
improvement from 1992's returns was scored by investors who jumped from cash
into more-volatile securities.  Whether in the Asian markets, the over-the-
counter market, or even the junk-bond market, concentrating risk was the key
to 1993's profits.
   In the absence of another blockbuster year like the one past, however, the
key to keeping those profits in 1994 will be the investor's skill in 
diversifying his or her risks away.  Although diversification may not be a 
terribly innovative way to prepare for future events, it is one worth 
re-emphasizing now that so many risk-averse investors have taken positions in
the stock, junk-bond, and international markets.
   It's easy to see why investors spurned cash-equivalent securities in 1993.
Since 1991, when inflation first showed signs of a long lasting dormancy,
annual cash returns have averaged about 4%--a far cry from the 9.7% annual
average return these securities posted from 1980 through 1990.  In 1993, those
returns fell to just above 3%, barely ahead of the 2.75% inflation rate.
   Although most high-quality-bond funds have produced impressive total returns
in the early 1990s, their income payouts (the returns that fixed-income
investors rely on most) have sunk to 6% or lower--hardly digestible for
investors used to the 9% cash payouts of the 1980s.  In this environment, 
investors seem convinced that the only truly palatable returns--the ones in the
double digits--are to be had in the most-volatile markets.
   This shift comes at a time when the traditional models of diversification 
have lost some of the currency.  Fifteen years ago, investment managers 
typically advised their clients to hold a portion of assets in cash for 
liquidity, a larger portion in stock for growth potential, another large portion
to bonds to provide steady income and to balance the volatility of stocks, and
a modest 5% to 10% stake in gold or real estate to keep inflation at bay.  This
plan was appealing in its simplicity, but it was difficult to practice in the
1980s.  Early in the decade, for example, extremely high yields on cash
equivalents drew investor moneys away from the stock market.  Those investors
were among the few individuals spared losses during the 1987 crash:  Bond, 
stock, and even international funds slid in the days surrounding the crash.  
Gold and real estate performed so poorly in the decade's later years that even a
modest presence of these securities depressed returns in the portfolios that 
held them.
   The meager inflation levels of the early 1990s, and the paltry fixed-income
returns that have accompanied those levels, have dealt yet another blow to
the traditional view of diversification.  Low inflation has also led investors 
to question the need for inflation hedges.  These challenges have led personal
money managers to re-examine their asset-allocation ideas.  The current 
thinking emphasizes equities, de-emphasizes bonds, limits (and, in some cases,
eliminates) cash, and trades in real estate and gold for shiny new positions
in high-flying international stocks.  As of the end of 1993, the average 
balanced fund held 9% of its assets in cash, 52% in stocks, 35% in bonds, and
7% in foreign holdings.
   Adding to the confusion, the supposedly opposing bond and stock markets have
moved together over the past several years (see graph at left..not included).
Indeed, much of the bull-market gains that both stocks and bonds have made over
the past five years owe to the same factor, namely rapidly declining interest
rates.  Furthermore, despite tiny inflation growth in 1993, gold and real-
estate funds were among last year's big winners.
   That confusion has made it difficult even for professional investors to gauge
appropriate asset allocations.  A recent article in "Barron's" noted that
traditional measures of market sentiment among both individual and professional
investors are almost uniformly bearish; asset-allocation vehicles, which in 
recent years have often reflected market sentiment, have an average cash 
position near 15%.  Despite this concern, however, equity mutual funds on the
whole are holding their cash positions down to about 8%--not an easy task during
a time of record mutual-fund asset growth.  According to tracking firm INDATA,
cash levels among private  pension funds have fallen to just 2.9%.
   It makes sense for investors to follow in the footsteps of the professionals;
certainly, investors who shifted to the equity and international arenas in 1993
are pleased that they did so.  In many ways, the recent shift toward stocks has
been both needed and welcomed, since investors have historically held too little
of their assets in stocks.  For all their recent successes, however, stocks 
still retain their place as volatile short-term performers.  Perhaps 1994's 
stock market will produce the serious correction that the bears anticipate; 
perhaps it will be yet another year of equity success.  No matter how 
incongruous the behavior of the securities markets may have been in recent 
years, diversification still provides the best means of preparing for any
contingency in 1994.  And perhaps the best form of diversification is the
traditional one--with a slight modification.
   Stocks should hold a prominent place in any asset-allocation scheme; so too
should bonds.  Yet cash cannot be forgotten.  Cash provides the only safe haven
in an overall bond- and stock-market correction;  If rising interest rates
punish bond and stock investments alike, investors who retain some cash exposure
will suffer least.
  The traditional view of inflation hedges, however, should be expanded to 
include any holdings with either the potential to perform well in a high-
inflation environment or the long-term potential to significantly outpace 
inflation.  This portfolio element would include such supercharged investments
as international or emerging-markets funds, small-cap growth funds, or volatile
sector funds.  This modification isn't necessarily a response to market changes
the 1990s have wrought, either:  Investors in the mid-1980s could have
substantially bolstered the returns on their domestic portfolios by including
modest stakes in such booming foreign exchanges as Mexico and Japan.
  This old-fashioned approach may not always provide double-digit gains, but its
winnings should be consistent, and more importantly, they should stay well 
ahead of inflation.  The cash investors of the 1980s enjoyed average annual 
returns of 9.88%, which afforded an inflation-adjusted real annual returns of
4.75% per year.  With inflation currently running under 3%, a portfolio need 
only return a modest 7.75% annually to provide the real returns that the 80s
cash investor is already used to.
   Any single asset allocation will not be appropriate for every investor;
individuals with a 20- or 30-year time horizon will naturally want to emphasize
equity exposure, and those seeking to buy a home three years from now will 
prefer safer, more liquid fixed-income instruments.  The traditional approach
to diversification, however, provides a useful template for every investor
that has the best chance to work well within the broadest variety of market
environments.

	In the last couple of days some firms have made changes to their
	model investment portfolios (both reducing the % in stocks,
	one offsetting with increase in cash %, and the other offsetting
	with increase in bond %).

	Here's some other model portfolios (broken down only to the
	stocks/bonds/cash level, I'd assume foreign/etc would be subsets
	of the appropriate catagory?) look as reported on NBR tonight
	(percentages are given in %stocks/%bonds/%cash):

Merrill Lynch	40/50/10	(upped bond position)
Smith Barney	50/35/15	(upped cash position)
Lehman Bros.	70/30/0
Bear, Sterns	55/35/10
Dean Witter	55/30/15
Oppenheimer	35/30/35