Great question, some good answers, rebalancing is the best answer. Now, the current "risk-parity" model is a split between bonds and stocks. Such that when stocks go down bonds go up in value/price, down in interest rate. The current problem with "risk Parity" at the moment is that stocks are extremely highly valuated, and bonds are as well but bonds don't have much room to go up prior to being bought at negative interest rates. So the bond portion needs to be extremely high to offset the size of the potential equity decline back to long term P/E ratios. So that's the equity / bond asset balancing act
So then between the equity and the bond portions, there is rebalancing possible. For bonds, with falling inflation, the better gains come from longer term bonds, and with rising inflation the better loss is with short term bonds. This concept is called duration of your bond portfolio.
Duration is measured in years. Generally, the higher the duration of a bond or a bond fund (meaning the longer you need to wait for the payment of coupons and return of principal), the more its price will drop as interest rates rise.
In the equity market, you can use different sector ETFs to change into and out of or change weightings. So the binary labels in equity tend to be growth versus value. Its a bit arbitrary, and not worth going down that rat hole. . . (rabbit holes are all furry, warm and full of cuddly nice pets) rat holes, not so much. . . Another arbitrary classification is large, mid and small capitalization stocks. There are ETFs for that. . Another segmentation may be hard versus financial assets, where hard assets are real estate and commodities versus banks and other corporate equity offerings. There are hard asset ETFs with agricultural and mining metals, as well as REITs. These will offset inflation if you want to offset bond losses with inflation sensitive assets.
Another equity segmentation is to look at dividend stocks. There are dividend aristocrat ETFs and S&P500 dividend ETFs, which will not fall as far and provide a small offset with dividends. . .
So with all these options, which would you "predict" or "forecast" will perform better in the future with your current outlook on the economy? no one knows the future definitively, but there are large persistent trends which increase and decrease over time which you should be following to get the equity portion correct.
And given a TV retirement or >55 population, the equity portion should be more weighted on the dividend aristocrat large and mid cap with small portion in hard assets, particularly realestate to offset inflation and a gradual return to a slow growth economy. . . the bond portion should be mid duration, 5-7 years, no more than 10 years, and 3-5 years with the older group. . .
I don't look at intl funds due to fx reasons, but that is for a much more sophisticated global outlook.
However, your personal portfolio needs to be customized to your goals, which are limited in time. ie Yale University does not have a time limit as its life is longer than a human life, so be careful of simple comparisons. . .
finance guy
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