Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies

When talking about stocks for the long run, then, it must mean something

So what is an investor to do? The next step lies in what is called the only free lunch in investing – diversification.

The risk-free rate is simply the return of Treasury bills. A higher Sharpe ratio is better, and a good rule of thumb is that risky asset classes have Sharpe ratios that cluster around the 0.20 to 0.30 range.

The Sharpe ratio is a measure of risk adjusted returns, and is calculated as: (returns – risk free rate)/volatility.

The unfortunate mathematics of a 75% decline requires an investor to realize a 300% gain just to get back to even – the equivalent of compounding at 4.8% for 30 years!

Once CAPE ratios rise above 30, forecasted future median real returns are negative for the following ten years – it doesn’t make sense to overpay for stocks!

The reason many people will invest in both stocks and bonds is that they are often non-correlated, meaning, stocks often zig while bonds zag.

The 60/40 allocation only spends about 22% of the time at new highs, and the other 78% in some degree of drawdown. Drawdowns are physically painful, and the behavioral research demonstrates that people hate losing money much more than the joy of similar gains. To be a good (read: patient) investor you need to be able to sit through the dry spells.

How much of your global stock allocation should be in the United States?