Gary,

I also respectfully disagree (but for other reasons than Hermes).

If you are nearing retirement, that allocation may be somewhat effective. But if not, it's a poor performer. Inflation alone, for most individuals, is anywhere from 4-8%. This portfolio would be hard pressed to compete.

The purpose of asset allocation is to optimize upside while reducing downside risk. If you look at the historical performance of the stock market, it has NEVER lost money in ANY 20 year time period. Pick every 20-year rolling calendar and take a look.

Bonds can also be just as risky as stocks, for a myriad of reasons. Treasury bonds are the only true guaranteed bond.

The next market problem crisis could involve municipal bonds. Municipal bonds have ratings that are PAID for. Insurers protect the bond's rating (giving it AAA), but they themselves are not financially able to handle it if bonds collapse. You may be buying a bond you "think" is AAA for the stability of the municipality, but in essence it is only AAA rated because the municipality has insurance. So a bond can essentially "buy" a AAA rating, by buying insurance (which investors pay for), instead of earning it. And the insurers are stretched thin and most could not handle multiple bond failures. This is an industry just asking for trouble.

Corporate bonds are not worth owning, in my opinion. They are not worth the increased risk. Also, corporate bonds are misunderstood. They are NOT a hedge against the stock market, as most corporate bonds are callable and only provide value in a rising market. In a down market, these bonds are typically "called" and you are forced to buy new bonds at lower yields.

A well-diversified portfolio will have all of these things in it, but in an effective mix.

Gary, the portfolio you describe is "betting the farm" on bonds, which is no different than the stock broker who wants you to "bet the farm" on stocks.

While this type of portfolio may be appropriate for some, it would be inappropriate for the vast majority of long-term investors.

Asset allocation is the most important decision you can make as an investor. And I'll favor on the side of academic research and years of empirical data supporting diversification, asset allocation, risk management and rebalancing.

I'll add, that all of the largest endowment funds, including Harvard's, have been no higher than 21% allocated to bonds. And Harvard, with that 21%, trimmed that down to 13% last year after taking a bit hit in 2006. Most of these funds, which may not manage quite $50 billion individually (Harvard's is just around $30 billion), favor indexing to buy entire markets, in addition to their bond portfolios.

Here is what Harvard's asset allocation looks like:
15% US equities
13% Commodities (about 3/4 of this part is in timber)
13% Private Equity
12% Hedge Funds
11% US Bonds
10% Foreign Equities
10% Real Estate
6% Inflation Index Bonds
5% Emerging Markets
5% High Yields
5% Foreign Bonds
-5% Borrowed Money

This is an example of effective diversification, although some of the things they are invested in may not be open to individual investors (some private equity investments and some hedge funds).

Multiple high beta assets with low correlations. Each of the different asset classes offer substantial returns over traditional bonds.

They doesn't care if they lose because something else will be negatively correlated to hedge the position.

If you took a standard asset allocation over 10 years and compared the results to their allocation (index returns only) you'd see 300 bps annualized outperformance.

I don't have any answers for Hermes or Mynion. Too much to reply to and the general public readers of this thread can draw their own conclusions.

But I do have more questions???

I very much enjoy these debates but I'm baffled (not really) as to why Allianz does it their way as opposed to Hermes' or Mynion's?

I didn't reveal who the insurance company was initially because I wanted to read the replies as to why they don't know what they are doing with their client's money.

Now I will be the first to admit I don't even know how to spell Headja Fnud. But it doesn’t make common sense and would be absurd for a firm to settle for the low guaranteed returns of treasury bonds on the bulk of $50 billion dollars when they could earn double digit returns North of 20% in Global Equity Markets year after year after year WITHOUT risk of loss of capital.

...I'm just saying...

Click HERE for their published financials.

Click HERE for their published investments.

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Gary,

why don't they do it?

Simple answer. They don't know how to do it. SInce they lack the knowledge they have to accept the risk of the lack of their knowledge and then have to settle for somehting that is safer but at the same time they are forced to accept to lower returns.

The lack of knowlegde, among other things, can be very expensive.

Listen Gary, if you like their approach, go for it. Nobody tries to talk you out of it. You don't have to post links to their financial statements.

As I always say:

There is no right or wrong investment strategy just a good and a bad investment strategy and the definition of good and bad is up to the individual.

There are so many strategies in the market-place and every company wil choose what they think is best. It is not realistic that every company will follow the same strategy.

One last thing:

It is very very hard for a company or an individual to admit that their approach is not really great or to just say we do this because we don't know any better that is why they have to sell their idea and their approach as something good.

There is the saying that the share price of a company is the scorecard of the CEO. Having said that, the performance of a fund, the ROI, is the scorecard of the manager/management team and the company.

__________________
It is not smart to play it safe but it is safe to play it smart.

Gary,

Allianz is an insurance company, and therefore much of the structure of their investments is going to be entirely dependent upon their obligations and insurance regulations. When you have products that have guarantees, then you need to invest your capital in a manner that supports providing those guarantees. These guarantees include regulatory obligations as they pertain to death benefits on insurance products.

Can you honestly compare how a multi-billion dollar insurance and financial services enterprise invests to an individual investor? I think not. Some of their hand is forced into their allocation, some of it is not. Individual investors don't have those same requirements.

If quality of product is any reflection on an insurance company, then Allianz rates pretty low in my book. Allianz is known for paying some of the highest commissions of any insurance company, but typically at the expense of policyholders. Their variable annuities are well known in our area for abusive sales practices (mainly due to the high commissions and lifetime surrender charges). They must have some good products somewhere (probably in banking?), maybe in Germany, but none of what I've seen here in the USA is superior to other companies I do business with.

Anyhow, I still don't understand how an individual investor gains value from knowing how a multi-billion dollar company invests its capital when they themselves have entirely different risk profiles. Many people try to invest like Warren Buffett, but how many investors have the money to buy the entire company to salvage an investment gone awry? Yet that is exactly what Warren Buffett would do (and has done).

Just a thought (or two).

Mynion wrote:
That's exactly correct. The 85% bonds in that pie chart represents guaranteed contractual obligations. So if we shifted our focus to the 15% that is their's to play with you still find no more than 1% in stocks. Personally I find that interesting.
Yes, because it is consistent with my main point of this debate and that is the preservation of a client's principal that is set aside for retirement should not be at risk in the market.

Why is it that only the Insurance Agent Financial Advisors ever point out to a client how much Return on Investment it will take to recover from a market downturn? Such as, a 25% loss in one year will require a 47% gain the following year just to keep EVEN with a safe investment just limping along at 5% per year.

Which brings me to yet another flawed "casual" mathematical assumption.
The conversation goes like this, "Yeah sure we lost 25% last year but made 25% back the next year so we're even."

No you're NOT even. You're still underwater by $6,250 from your original investment and $16,500 behind the investor who's just limping along at 5% per year with all principal and interest safe and sound. See interesting graphics below.

$100,000 - 25% = $75,000

$75,000 + 25% = $93,750

vs.

$100,000 + 5% = $105,000 + 5% = $110,250

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Gary, I've used that exact mathematical example, albeit in a more simplified fashion using 4 quarters, to have a similar discussion with many clients.

I agree that return OF my money is just as important as return ON my money. However, this example is mostly appropriate for those nearing/approaching or already in retirement. Someone who has 30+ years to save and a tolerance for short-term losses can realize significantly higher long-term gains through a diversified portfolio of securities.

"Limping" along at a 5% return is nice, but inflation has averaged about 4% (3% in more recent years, but we've had times of double-digits in the past, too), so you are barely keeping up with inflation. Not to mention that inflation is not the only wealth erosion factor you have to deal with. A young family also has to deal with technological change, planned obsolescence, and rising healthcare and education costs. A business can handle these erosion factors very differently, and much are offset by tax subsidies and write-offs.

I think we're on the same page, we just have different perspectives (I'm probably younger and more optimistic about the global marketplace). And I do think it is interesting how corporations and institutional investors manage their assets. Keep in mind, too, that if a business like Allianz or anyone else is seeing a good ROI on themselves, they will seek to invest capital in their businesses and this will not be reflected in their capital asset allocation.

Gary,

all the charts and calculations that you seem to have are correct as far as the numbers are concerned but here is a question for you:

Why should a smart professional fund-manager loose 25%?

I don't say that it doesn't happen but what I do say is the following:

There is no reason at all for any sophisticated professional fund-manager to loose any money during a one-year period. There may be a loss during a four-week period maybe even a thre-month period but never for a twelve month period.

You assume that you will face a loss and there is nothing wrong with that but considering that mature global equity markets themselves are not risky there should be no reason to post such a loss. Bad financial moves by the fund-manager will cause the loss but once again that is not the fault of the markets.

If I would ask 10,000 individuals who drive cars on advice and recommendations on how to fly a plane chances are that the advice and recommendations I will receive will be worthless and probably scare me but if I ask a pilot the advice and recommendations will be of value. The same holds true for the investment world.

Why do only Insurance Agent Financial Advisors talk about losses?

My guess is because the only way they know how to invest in global equity markets is with strategies which will cause them to loose money and they have to 'insure' themselves and go with low-risk low return investments. This is just another example that the lack of knowledge is what causes risk and not that the markets themselves are risky.

The industry will point to that risk but not to their lack of knowledge and then try to sell you instruments to limit those risks.

I have one final question for you:

What do you think poses a greater risk - Mature global equity markets or the risk of knowledge of your praised Insurance Agent Financial Advisors?

You already know my answer.

__________________
It is not smart to play it safe but it is safe to play it smart.

Hermes,

If your hedge still exists 10 years from now, I'll buy in.

Until then, continue to provide your opinion but know that you don't have the experience to justify that your strategy works in all markets. Much of the profits in some global equity markets are investments in infrastructure, once the infrastructure is there those massive returns may slip away. Mature global markets don't have the same massive growth trends, but in turn have less risk.

However, investing globally also carries other types of risks that are principles of economics that cannot be ignored. For example, there is currency risk when investing globally.

If you are a U.S. investor and you have stocks in Europe, the return that you will realize is affected by both the change in the price of the stocks and the change of the Euro against the U.S. dollar. Suppose that you realized a return in the stocks of 15% but if the Euro depreciated 15% against the U.S. dollar, you would realize no gain.

If your investment deals with borrowed funds in other currencies, the risk is even greater.

To ignore risk is infantile. Managing risk is the key to successful investing in any market, international or domestic.

Insurance companies understand how to manage risk. What you have to decide is whether you personally will accept the risk, or would you rather shift it to someone else? If you shift it to an insurance company, they are managing the risk and they are very, very good at it.

Hermes, you can earn your 50+% returns or whatever, and build a big pile of wealth. But you CANNOT PROTECT it, from Lawsuit, Death, or Disability without insurance or an insurance product. So what good is your massive fortune when your family loses it all in a lawsuit because your 16-year old daughter ran a red light and killed a 35-year old executive (as happened to one of my clients)? All because you don't own an umbrella liability policy that would've cost you $500 a year in annual premium! (For the record, my client owned the policy and was just fine, but had they not, they would've lost everything.)

And actually, to answer your question, I think mature global equity markets carry more risk than obtaining financial advice from an insurance agent.

You say, quite often, that investing in mature global equity markets works incredibly well IF YOU KNOW WHAT YOU ARE DOING. Yet you provide no proof or otherwise to justify why any average consumer reading this board to be able to trust your advice. You dangle big rate of return numbers (and put down all smaller numbers), trying to sell people on the idea of something better being out there, but are unable to provide supporting data in any of your posts.

So before you go condemning Insurance Agent Financial Advisors, understand what they really do for people, and you'll find that there are many problems/challenges in this world that cannot be solved by "rate of return", or ROI, alone.

I basically disagree with many things that you have mentioned in your last post.

If you think that global equity markets are risky that's fine. I don't provide any proof on purpose. I don't mention companies that accomplish just that on purpose.

Do they exist?

Yes. They do.

You don't know what experience I have so please do not comment on that.

I never said ignore risk, I said that global equity markets are not risky to start with. Period. That is my opinion on it. Insurance companies may do a very good job to manage investment risk but they try to manage risk where there is no risk to be managed and that is not very smart.

I have always said that in the end it comes down to personal preference. I don't provide any numbers and figures or mention specific companies for a reasons.

Once again global equity markets are not risky but the lack of knowledge to the majority makes them risky to those. If you don't believe it or think otherwise...fine. That is your opinion.

One fact that I find very interesting is an individual or group of individuals that do not know anything about it but try to tell an individual who does that why it won't work. It amuses me.

You like insurance companies and their strategies. Fine. Stick with them. I don't have a problem with it (why should I?). Your comments show what type of backround you have and explains your point of view. The market is big enough for all opinions and strategies.

I never said not to insure but there is another way of insurance that you can 'buy'. The one that you won't like and agree on but that does not mean that it doesn't exist.

You think a particular strategy or industry is a good choice and I disagree. That's how the markets work. If we would all do the same things and always agree the markets would not function but don't get angry that you may lack the knowledge of individuals and companies that can accomplish things that an entire industry neither accomplished nor ever will accomplish.

__________________
It is not smart to play it safe but it is safe to play it smart.