Thursday, July 30, 2015

Abandoning the Efficient Frontier

I have two tax deferred retirement accounts.  One of them is much larger than the other.  The larger fund gets more of my attention.  The smaller account has an asset allocation that was much more aggressive than the larger one.  In fact, it is surfing the crest of the "Efficient Frontier".

Like many investors, I fell into the trap of staying too long.  Two key pieces of advice are "Nobody every went broke selling too soon" and "Pigs get fat and hogs get slaughtered."

I decided that I had overstayed my position and am liquidating the 40% International (Pacific basin!) position in my smaller account.  My traded is programmed to reinvest in a short duration bond fund that is 65% US Govt securities and 35% high quality corporate bonds.  As of tomorrow at the closing bell my smaller account will be 60%  Domestic Equity Index and 40% short term bond fund.

It is not prudent to carry a lot of sail if you expect gale force winds and heavy seas.
Proponents of asset allocation are big cheerleaders for maintaining one's allocation regardless of perceived market conditions.  Their models assume risk/volatility that is symmetric, i.e. equal in both upward and downward directions regardless of market run-up.  The idea of symmetric volatility is difficult to defend when the market is at extreme valuations relative to the underlying fundamentals.

My gut feel is that there may actually be one or two more legs up in this bull market.  Further, my gut feel is those legs up will be on the backs of very few firms and the break downward will be unpredictable and brittle, that is, suddenly and precipitously downward.

I think I got lucky.  I accept the Chinese government's massive intervention in their equity markets as a gift.  It is like a Bugs Bunny cartoon where the falling piano freezes in mid-air, just long enough for Bugs to step to the side.  I may be leaving some money on the table but not enough to be worth losing sleep over. 

As always, I am not peddling advice.  I am merely sharing what I am doing inside my sandbox.  Call it entertainment.


  1. Good point, and I need to rework mine too! Thanks for the reminder!

  2. Good point, and I need to rework mine too! Thanks for the reminder!


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