The Dynamics of Asset Allocation

To my mind, every portfolio is split into 100 Units, with each unit representing 1% of the portfolio.The allocation itself in inherently subjective. We currently look at government bonds as the risk-free rate of return; that assumption may in itself be challenged when government debts start to cripple their supposed security. It follows that currency risk will become a theme in the future, and at some point over the next few decades - diversification may well involve as its basis currency diversification. Some may argue that commodities will be all that overcome the intrinsic risk that national debt creates upon currencies - these may all one day become themes that command greater attention, but for now - an awareness of these possibilities is sufficient. With US National Debt at close to US$12 trillion, on a GDP of a similar size - we are in a situation where secular debt-risk will need to come into play, but we are not yet at the point where that risk is of any immediate value.

Investment allocation has never been more exciting; neither has it ever been more challenging. We live in a global world with unlimited opportunity and incredible peril. Portfolio's over the course of the global financial crisis have lost as much as 85% in certain cases. The great push to instant riches have been punished and the true value to staying on the ball and actively managing your investments has played out. This has been a time of great learning, for many.

Now, while setting your own asset allocation, you need to create a timeline of where you are and where you want to be and examine the possibility of where your hopes could realistically take you. If you have a portfolio of $100,000 and you want to double it in 6 years, you can create an allocation that gives you a good chance of doing so. That allocation may be 50 units of debt, 20 units of commodities and 30 units of equities in certain situations, with the allocation to debt or increasing to 80, 90 or even 100 units in certain situations (market bubbles come to mind as a situation where you may want to do so).

The more aggressive investor may initiate shorts in similar situations: the nuances of allocation are complicated and they can only be addressed on an individual basis. What I hope to do on this blog is make recommendations accross asset classes - primarily Equities (including Futures and Options), Commodities to a more limited degree and occasionally something from debt markets.

For the purpose of simplicity, I will sub-divide each allocation into 100 units each. So, every portfolio consiststs of the following asset classes:
1. Debt
2. Long-term Equity
3. Trading (Futures, Options, Margin, Commodity Futures, Exchange Rate Futures, etc.)
4. ETFs/Commdoities

A 10 unit recommendation on NIFTY Futures for instance will mean 10/100 in Trading; so if your allocation to trading is 20 units, we're talking about 2 units of your overall portfolio or 2%.