Pozio on asset allocation

This blog is oriented towards the non-conventionalist investors, obviously.

What Is The Best Asset Allocation Strategy?
by Joe Ponzio

A common question among investors — both conventional and non-conventional — is: How should I allocate my portfolio so I am best prepared to capitalize on (or protect myself from) the coming years in the markets? Mutual fund, which were designed to, in part, shield people from volatility, aren't living up to their promises and even "well-diversified, long-term" mutual fund investors are finding it difficult to "stay the course" like their advisers instructed.

Here's how to do it.

If you are new to F Wall Street, allow me to present to you the four types of investors that are striving for long-term growth:

1. The general conventionalist is looking for long-term, steady growth and can not, or does not want to, stomach the stock markets. 50% of the population falls into this category.
2. The enterprising conventionalist is also looking for long-term growth but is willing to tolerate minor fluctuations in stock prices. 35% of investors are enterprising conventionalists.
3. Safety-seekers can tolerate market fluctuations...to a point. Daily and minor fluctuations are largely irrelevant; large price changes are still gut-wrenching. >14% of investors are safety-seekers.
4. Non-conventionalists could care less about market or price fluctuations and look to find value and opportunities in every market. <1%>15%
The Non-Conventionalist Approach to Buying

Buying workouts is fairly straightforward. To lift a bit from Benjamin Graham, if, upon thorough analysis of the deal, you see an opportunity for both safety of principal and a satisfactory return, you should buy. The greater the opportunity (for both return and safety), the more you should buy.

When approaching businesses, you should have a definite price in mind. Then, you should begin buying in 10%-20% chunks — once a week or so. That is, if you plan to commit 20% of your portfolio to a particular opportunity, begin buying in 2%-4% increments over five to ten weeks. This serves two purposes: (1) it allows you to capitalize even more if the price continue to drop, and (2) it prevents you from guru-itis, the belief that you are always right and everyone else is always wrong. (You will be wrong from time to time.)
Come on Joe, I'm not working with millions here!

How much is enough? Assuming you are putting 10% of your portfolio into each opportunity, that you intend to buy over five weeks, and that you pay an average of $10 in commissions for each trade, a non-conventionalist investor should have at least $50,000 so that no single transaction costs more than 1% of his or her investment.

If you are working with less than $50,000, then you'll have to make some sacrifices. Your purchases will have to be made over just two or three weeks or in a single transaction. You'll be forced to engage in less workouts and have to be much more careful in your selection.

Still, don't be disheartened if you currently have just a few thousand dollars. Put money aside every month and keep in mind that my kids collectively own just two stocks as I build their portfolios. For them, workouts are out of the question right now. I hope they each have 80 years of investing ahead of them so I'm not concerned with capitalizing on every opportunity I see today. The next 80 years should present a few more.
A Final Note/Disclaimer

The "Expected return" assumptions above assume that the next forty years are substantially the same as the last forty. That is, through wars, recessions, high and low federal funds rates, elections, housing booms and busts, tech bubbles, inflation, deflation, leveraging, deleveraging, and salad oil scandals, our economy and country will survive. If I'm wrong, your money will be worthless, all the stocks and bonds in the world won't save you, and the General Conventionalists buying Australian bonds will look like geniuses!