Traditional Assets: Deep Dive

We discussed the two broad asset classes, traditional and alternative, in prior blogs. For this edition I would like to take a deep dive into my thoughts and questions on Traditional Assets. A similar deep dive on Alternative Assets will follow in future blogs.

To begin, let’s summarize our target allocations of 50% of ones’ total net worth. 

Traditional Assets: Target 50% | Actual %

Equities: 20% | TBD

Bonds: 10% | TBD 

Cash: 20% | TBD

I prefer the flexibility of tracking a target percentage allocation, and then monitor where the actual allocation is currently. This allows me to develop plans to add to positions not yet at target levels.

For each sub-category, here are my current targets:

Equities: 20% - This asset class has the highest potential allocation level in our model, 20%. I believe that equities will appreciate as the market grows alongside the M2 money supply and related economy. My allocation recommendations are centered on United States-based equities as I believe the accounting system and rule of law are unsurpassed when exploring international opportunities. That said, I believe S&P 500 index and the Nasdaq 100 index, two example ticker symbols are SPY and QQQ respectively, should be a part of my portfolio.  As a side note, I also appreciate the ticker QQQM which offers a lower management fee in comparison to QQQ, but comes at the cost of a smaller options market (QQQ has the more robust options market of the two).  I do this with full knowledge of the overlap between SPY and QQQ in terms of some of the underlying assets and am okay with the over-exposure seeing as how those small number of companies appear to have been driving the overall, post-Covid market returns.   That said, I have heard estimates that over long periods of time, compounding the marginally higher rate, the investment with the lower relative management fee could see 20-25% more return over 25 years.

Bonds: 10% - This asset class has the best position in the capital structure, more safe than equities but without as high of a return potential.  I believe that ten percent is the right allocation for me, given my long term horizon balanced with a principle to preserve capital.

Cash: 20% - This asset class is the most liquid, and includes short term US government Treasury bills. That said, the high liquidity and low risk comes at a cost of low yield.  I believe 20% should be the maximum level, and that as asset prices decline for investment areas you are interested in accumulating, then use this cash to increase your holdings in depressed assets