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Asset Allocation

LarryH
edited September 2012 in Off-Topic
What is an asset allocation method of investing?  The simple answer is to select 60% equity assets and 40% bond assets that have a low correlation to each other and rebalance as necessary to maintain the 60:40 ratio. (Other ratios can also be used but 60:40 is commonly used.)

Q1:  Should the rebalance occur due to market action or a periodic calendar date?  

I think using market action would be responding to "market noise".  Using a calendar date will, hopefully, allow the market settle down from the "spikes" (irrational exuberance) that occur.

Q2:  What are the asset categories used in an asset allocation scheme?

Usually equities are subdivided into domestic and international .  Bonds become Money Market and Bonds.  I would like to consider Inflation Protection as another category.  Comment on the following percentage breakdownn:

30% in Domestic Equities
25% in International Equities
30% in Bonds
10% in Inflation Protection
 5% in Money Market

Q3:  How does one determine what assets go into the various categories?

Q3.1  Suggestions for determining asset correlations.

Q3.2 How to assess PIMCO funds?

I am considering using a REIT based fund (PETDX), and a commodity based fund (PCRDX) for my Inflation Protection category.  I note from Morningstar the following net (long - short) allocation to bonds:
  PRCDX:  89.56%
  PETDX:  103.01%

Can I assume these funds utilize bonds in their investment strategy but are not truly "bond funds".

Another example:  PIMCO International StocksPLUS (PIPDX) has the following net allocations:

 -77.84%  in Cash (leverage?)
   0.00%  in US Stocks
  100.49% in non-US Stocks
   80.42% in Bonds
   -3.07% in Other

Any help on how to assess PIMCO funds would be appreciated.

Q4  Would using PIMCO funds contradict any basic asset allocation principles? (They are not index funds!)

Should I stick to some nice boring index funds, e.g. a  "lazy portfolio"?

Q5 Would your perception that we are in a secular bear market affect the allocation percentages? For example would you use a 40% equity to 60% bond ratio during a secular bear market?

Thanks for any help.

Comments

  • claimui
    The PIMCO stock funds invest in derivatives that track stock performance without being directly invested in the stocks themselves. (Same with the commodity funds.) That is why the Morningstar portfolio descriptions can be confusing. Some more discussion in this thread: http://www.mutualfundobserver.com/discuss/index.php?p=/discussion/3545/pimco-domestic-equity-funds/p1

    I view the PIMCO stock funds as alternatives to index funds. Historically they have performed very similarly to their respective indexes, generally with some higher return. However, being invested in derivatives means there are some extra risks compared to a plain vanilla stock index fund. Also the PIMCO funds tend to generate lots of taxable dividends, so for a taxable account, a standard stock index fund may be more suitable.
  • LarryH
    Reply to @claimui:

    Thanks; the link to the discussion of PIMCO funds was very interesting. I intend to use these funds in an IRA because of the taxable income generated.
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