On May 16, 2:05 am, rick bryan <rick.br...[at]rcn.com> wrote:
- quote -

Rick,

When I think of portfolio design, I break the market up into the
following asset classes. Large-Cap Value, Mid-Cap Value, Small-Cap
Value, Large-Cap Growth, Mid-Cap Growth, Small-Cap Growth,
International, REITs, and possibly bonds. Then I set up percentages I
wish to invest in each asset class. For the international, I will
break that up further into a wide variety of emerging markets and
countries.

Even as a retired person, I do not use bonds as I have income from
"bond equivalent" investments such as social security and pensions.

BTW, I am using MVO software to aid in setting up asset allocation
percentages for future years.

Physlab

Rick,

I may have misread the question, but your original post made it sound
like the advisor opened the conversation with 60/40 and only
afterwards did he use a risk tolerance questionaire to determine what
to invest in each asset class. If I misunderstood, I apologize in
advance.

Just to make sure everything is clear the 60/40 mix should be A RESULT
of the your risk tolerance (risk tolerance first, asset allocation
second). In this particular instance, "moderate" should = 60/40 on the
questionaire he uses. "Moderately aggressive" might equal 85/15 and so
forth.

I've met an advisor or two that don't this. They start with the same
equity/debt mix everytime (i.e. 60/40) and then adjust the proportions
in each smaller asset class to increase or lower the risk. For
instance, always 60/40 overall, but one client may be 25% cumulative
small cap and another will also be 60/40 but only 10% cumulative small
cap.

I am leary of this practice. Its not the worst thing an advisor could
do for you (especially if the risk/return tradeoff still matches your
personality), but they're not doing for your benefit. They're doing it
for uniformity (read: cookie cutter) and to avoid suitability scrutiny
from their compliance departments by having everyone look like
"moderates" on the surface. It is also very difficult to get the risk/
return profile of highly aggresive and super conservative investors to
fit in this type of prearranged model.

On May 16, 2:05 am, rick bryan <rick.br...[at]rcn.com> wrote:
- quote -

Every category can be further broken down. Say you want 60% stock and
40% bonds.

Then you start splicing up the stock portion:
40% large
30% small
30% intl

Then splice up the bond portion:
50% short
30% medium
20% long

Multiply the sub-percentages against the overall percentenges --
example, 40% large X 60% stock = 24%. So you end up with something
that looks like:
24% large stock
18% small stock
18% intl stock
20% short bonds
12% medium bonds
8% long bonds

Can someone help me understand portfolio design?

An advisor might recommend a portfolio that's 60% stocks and 40%
bonds, let's say.

Then on the risk tolerance questionnaire a client might come out as
"moderate," for example. And the model portfolio for that investor might
be 5% aggregate bonds, 20% large cap value, 20% large cap growth, 15%
mid-cap . . . etc etc. I'm just making up these numbers.

But my question has to do with not understanding how to
reconcile a "60/40" stock/bond portfolio with a model asset allocation
portfolio that's defined in terms of large cap, mid-cap, small cap, etc.
Are these two ways of designing a portfolio supposed to coincide somehow?

What am I missing?