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(Estimated Reading Time: 15 minutes)

If the length of this article intimidates you, consider the potential rewards: a complete transformation of your approach to investing. What you'll uncover here goes beyond typical investment tactics. It's a foundational strategy that top-tier professional investors and seasoned wealth advisors rely on extensively. We're talking about strategic asset allocation... a topic that should command your full attention.

Understanding asset allocation is paramount, as it's the single most critical decision you'll make for your investments. It not only shapes your potential returns but also outlines the risks you're willing to take. Disregarding its importance is a significant oversight and one that usually costs self-directed investors a significant lag versus their benchmarks... assuming they have any!

Now, you may be asking, "Why do retail investors consistently underperform the market?" A lack of financial literacy is a major contributing factor. That's why we at VMF Research are committed to arming you not just with investment ideas, but also with the knowledge to comprehend the reasoning behind them. We've even penned a detailed research piece on the pitfalls of retail investing... must-read that complements this article.

We won't delve into an exhaustive list of investor mistakes here, as there are many, and this article is primarily focused on asset allocation. Instead, let's zero in on two particularly damaging errors. These aren't trivial missteps... they stem from behavioral biases that are deeply ingrained in our psychology and lead to emotional decision-making. Overconfidence, for instance, can lead you to construct a perilously concentrated portfolio. And... if you currently hold fewer than ten individual stocks, this message is aimed directly at you! Another key bias is loss aversion, which may cause you to prematurely sell off profitable investments while holding on to the losers until they decimate your portfolio. This is just like a gardener pruning his flowers while nurturing the weeds. When combined, these two biases can significantly diminish your chances of achieving satisfactory investment results.


So, how does a well-executed asset allocation strategy come to your rescue?

It acts as your investment roadmap, a well-crafted plan that shields you from these pitfalls. A robust asset allocation strategy not only enhances your financial performance but also adds a layer of psychological safety, reducing the likelihood of emotionally driven errors in judgment... those critical moments when fear or greed threaten to seize the wheel from rational decision-making.
 

As we delve deeper into the intricacies of asset allocation, let’s take a moment to define it clearly. Think of asset allocation as both an art and a science… it involves distributing your capital across various asset classes. However, truly strategic asset allocation extends beyond mere diversification. It requires a well-articulated plan that specifies benchmarks for the proportion of each asset class in your portfolio. This plan should be based on sound capital market expectations, focusing on key metrics for every asset class, such as expected returns, risk, and correlations. Equally important is establishing a clear strategy for rebalancing your portfolio as the weights of asset classes change over time.

Unlike many wealth managers who restrict portfolios to just stocks and bonds, VMF Research broadens the horizon. We believe a sophisticated opportunity set should include not only traditional assets but also increasingly significant alternatives such as real estate, commodities, private equity, private debt, and even emerging categories like cryptocurrencies and volatility. Yes, we treat volatility as a tradable asset class. We'll delve deeper into these alternative assets in future discussions. For now, you should understand that having an expanded opportunity set is a real game-changer for your strategic asset allocation and, consequently, for your expected risk-adjusted returns.

Understanding strategic asset allocation introduces you to one of the investment world's proverbial free lunches: diversification. This approach shields you from severe volatility in any single asset class, providing a psychological safety net. It's vital to remember that every asset class, even those perceived as 'safe' like short-term government bonds, faces periods of rough performance, commonly known as drawdowns... the peak to trough loss you may experience with any investment. Moreover, in an inflationary environment, while the nominal return might appear positive, the real return—adjusted for inflation—could actually be negative! Grasping this distinction is crucial for anyone navigating today's financial markets.

The magic of a well-crafted asset allocation strategy lies in its less-than-perfect correlation among asset classes. When some zig, others zag, effectively smoothing out your portfolio's overall volatility. And that's the core advantage of a well-crafted strategic asset allocation: it minimizes drawdowns, reducing the likelihood of emotional, impulsive decisions that lead to common investment mistakes. Over the long term, the discipline that comes from this robust approach not only enables you to capture risk premiums across various asset classes but also enhances your potential for achieving excess returns.

Now, let’s consider some time-tested asset allocation models to give context to our own approach at VMF Research. The "60/40 Portfolio," the poster child of traditional asset allocation, allocates 60% to stocks and 40% to bonds. The strategy offers a significant advantage: stocks and bonds often exhibit low or even inverse correlations. However, the relationship isn’t always stable. During periods of unexpected inflation, both can plummet in tandem, thereby undermining the portfolio's diversification benefit. This was the case in 2022... a disastrous year for the 60/40 asset allocation model.

It's precisely here that an alternative like Ray Dalio’s "All Weather Portfolio" shines. It not only diversifies across stocks and bonds but incorporates other asset classes, like commodities... specifically, gold. The portfolio is engineered to withstand various economic conditions, whether inflationary, disinflationary, or even deflationary. This approach aims to deliver more consistent returns by balancing risk across asset classes.

Another alternative is the Endowment Model, also known as the Yale Model, championed by the late David Swensen. This approach also expands the opportunity set to include alternative assets like real estate, natural resources, and especially private equity. Swensen underscored the advantages of diversification when he said, 'Diversification makes your portfolio better'—a simple but powerful quote.

And that’s the crux of what we offer through our VMF's Strategic Asset Allocation newsletter—a multi-asset class model portfolio that aims to reduce drawdowns, making your investment journey less susceptible to emotional blunders.

Of course, there are other noteworthy strategies like the Risk Parity approach, which also incorporates a broad range of asset classes. Its unique feature is the mathematical rigor used to allocate capital based on each asset’s contribution to overall portfolio risk.

Simpler models like the Permanent Portfolio and the 1/N Rule are also worth your attention. These strategies allocate equal weights to a predetermined set of asset classes. Despite their straightforward nature, they have historically demonstrated resilience, especially when the conventional 60/40 portfolio has faltered. This reaffirms the benefits of broadening your investment horizon. One model deserving special mention is Harry Browne’s Permanent Portfolio. It allocates 25% each to U.S. Large Caps, T-Bills, 30-Year Bonds, and Gold. Why single out this strategy? It notably outperformed key benchmarks during the inflation-riddled 1970s. This decade, with its multiple inflation waves, bears an increasing resemblance to our current economic and macro landscape... a subject we cover extensively in our publications.

We could also delve into more academically inclined strategies like Mean-Variance Optimization, but these often get bogged down in analytical complexities and often make the assumption that the future will mirror the past. This is a risky proposition in a world where asset class correlations are anything but static, especially in the current climate… as we will explore later.

By now, the importance of asset allocation should be crystal clear. Professional investors and wealth advisors around the globe regard it as the cornerstone of any portfolio and the primary driver of expected returns. Whether you realize it or not, your current holdings already reflect an asset allocation strategy. For instance, if you've never consciously considered asset allocation and own just a few stocks, your portfolio is essentially 100% allocated to equities. Such a concentrated portfolio not only exposes you to specific risks tied to individual stocks but also elevates your portfolio's overall volatility. And... at this point, you already know that this heightened risk might lead to emotionally-driven decisions. Moreover, by neglecting opportunities in other asset classes that offer less-than-perfect correlations, you are essentially leaving more efficient returns—higher returns per unit of risk—on the table!

Understanding why most retail investors underperform and what sets successful professionals apart uniquely positions you for a more sophisticated approach to portfolio construction. This isn't just about improving returns... it's about deepening your understanding of how financial markets truly work… about augmenting your financial literacy!

As you begin to consciously decide on your strategic asset allocation, you lay the groundwork for better outcomes. This enables your portfolio to capture risk premiums across asset classes, improving both returns and efficiency.


Now, let’s shift our focus to what you can expect from our Tier 1 offering: VMF's Strategic Asset Allocation.

Our approach here is top-down and discretionary. By 'top-down,' we mean that we start with a broad macroeconomic and market analysis before honing in on individual securities. 'Discretionary' means that our decisions aren't rule-based but grounded in our judgment and expertise.

Across all Tiers, our portfolio construction is guided by a proprietary Investment Process. This isn't just a static formula… it’s a living, evolving framework that encapsulates not only my extensive experience and professional credentials but also embodies a commitment to continuous improvement—a journey that our subscribers will witness in real-time. While the foundation of this Investment Process is built on five key pillars—Fundamentals, Technicals, Sentiment, Macro, and Liquidity—their influence may vary across our different Tiers, with each employing its own unique but complementary investment approach.

Specifically for Tier 1, we emphasize the Macro, Technicals, and Liquidity pillars. This focus is particularly relevant in today’s market environment, which is increasingly shaped by the fiscal and monetary policies of leading economic blocs. You can explore our proprietary Investment Process in greater detail through a dedicated free research piece available on our website.

In line with the practices of top-tier professional investors and elite wealth managers, our Tier One model portfolio reflects an expanded opportunity set. We go beyond the traditional staples of stocks and bonds to include a diverse array of alternative assets such as commodities, real estate, and even volatility and cryptocurrencies. While our focus is exclusively on liquid assets traded through ETFs, this doesn’t mean we are afraid to venture into unconventional asset classes, given the fast-expanding universe of assets and strategies available through ETFs. Although we steer clear of private market strategies like private equity and private debt, rest assured… we are always on the lookout for suitable public market proxies that capture the most lucrative segments of these alternative assets. We take a particular interest in Private Equity's focus on disruptive innovation, often manifested through sub-asset classes like venture capital. At VMF Research, we consistently scan public markets for this 'disruptive innovation.' The opportunities are there… you just need to know where, and especially, when to find them.

Our rebalancing strategy also sets us apart. Rather than adhering to a rigid, calendar-based approach, our rebalancing decisions stem from the careful implementation of our proprietary Investment Process, with an increased focus on technicals, fundamentals, and market sentiment. In Tier 1, you will be kept in the loop about every change we make to our model portfolio... and more importantly, the rationale behind these decisions.

So, what's our benchmark for success? It’s the Global Market Portfolio—a diversified mix of all investable asset classes, each weighted by its market value. While not easily investable or measurable due to its comprehensive scope and the illiquidity of certain asset classes, the Global Market Portfolio serves as the gold standard for diversification. In our inaugural edition of VMF's Strategic Asset Allocation, you will learn how we construct our proprietary benchmark based on the Global Market Portfolio framework. In an environment of ever-changing markets, our objective is to optimize the risk-adjusted returns of our model portfolio by leveraging the most extensive range of liquid and easily tradable investment products available. Using our Investment Process as a guide, we aim to outperform our benchmark by deciding when to overweight, underweight, or maintain a neutral position in each investable asset class and by minutely fine-tuning the composition of each.

In short, our objectives are straightforward: to outperform our benchmark while keeping you informed every step of the way. Achieving this isn't just about setting the right asset class weights... it particularly involves the nuanced and minute composition of each asset class. For instance, within the equity asset class, we may lean toward rewarded risk factors that have historically outperformed, such as momentum, quality, and value. Additionally, in terms of geographical exposure, we could overweight markets whose total capitalization is disproportionate to their share of global GDP growth and demographic potential. Our ambition is twofold: to outperform the benchmark and to augment your financial literacy.

At this juncture, it's crucial to underscore that we are not financial advisors offering personalized advice. Given that we are unaware of your specific investment goals, risk tolerance, and other unique constraints, we strongly urge you to read our Terms and Conditions in full. What we do offer is a transparent, actionable model portfolio, calibrated against our proprietary version of the Global Market Portfolio—considered the apex of diversification and a meaningful measure of the rise in global wealth. Driven by the aspiration to secure long-term returns that consistently outperform this challenging benchmark, we invite you to join us on this quest for financial independence and control. As an enterprise committed to excellence and ethics, we look forward to embarking on this journey together.

As we conclude our in-depth exploration of asset allocation, allow us to highlight the core features that set VMF’s Strategic Asset Allocation apart, providing you with distinct advantages in your investment journey:

. Access to a Strategic Asset Allocation Model Portfolio: Benefit from a meticulously curated model portfolio that spans a diverse range of asset classes, replicating an investment approach typically reserved for high net-worth clients of elite wealth management firms.

. Proprietary Investment Process: Our investment framework is built on five core pillars—Fundamentals, Technicals, Sentiment, Macro, and Liquidity. A process that's a living entity, constantly refined and updated.

. Expanded Opportunity Set: Explore beyond traditional asset classes like stocks and bonds to include alternatives such as commodities, real estate, volatility, and cryptocurrencies. We focus on liquid assets, primarily traded through ETFs.

. Sophisticated Rebalancing Approach: Our rebalancing strategy goes beyond traditional methods like calendar or corridor rebalancing. It is dynamically informed by our Investment Process, with technicals, fundamentals, and sentiment playing a heightened role. We ensure you understand the why, how and when of every change we make to the model portfolio.

. Defined Benchmark for Accountability: We benchmark performance against our proprietary and investable version of the Global Market Portfolio, providing a meaningful measure of success and ensuring accountability.

. Transparency and Financial Literacy: Our goal is to not only outperform our benchmark over the long term but also to enhance your investing skills and refine your investment process. We commit to a continuous investment in knowledge and education.

. Commitment to Excellence and Ethics: Fueled by ambition and a passion for financial mastery, our enterprise holds ethical practice in the highest regard, prioritizing your interests above all else.

And… what about its cost?

Cost-effectiveness is a cornerstone of our offering. If you have ever been a client of a wealth management firm, invested in a hedge fund, or allocated funds to a mutual fund, you are likely aware that fees can significantly drag on long-term returns. This is one of the key advantages that self-directed investors enjoy... the ability to avoid exorbitant management and performance fees that can erode your hard-earned capital.

But cost control isn't merely about avoiding fees… it's about getting extraordinary value for every dollar invested. Often, fees are the hidden reason why even clients of reputable investment management firms fail to beat benchmarks over the long term. Hidden costs, wrapped in complex fee structures, can stealthily erode an account's profitability.

That's where VMF Research's Tier One comes into play. This foundational offering focuses on strategic asset allocation and is priced affordably to help transform your long-term financial outcomes. In line with our mission to democratize financial literacy and provide institutional-grade financial research, Tier One is not only effective but also our most affordable product. We're committed to delivering significant impact in a cost-effective manner. Our aim is to empower you with top-tier financial research, all without the burdensome fees that often undermine performance.

Upon subscribing, you will gain access to our monthly publication, which features actionable investment recommendations and in-depth analyses of our investment theses. Additionally, we'll keep you informed with weekly commentaries that delve into market events and their implications for our model portfolio. Below, you can catch a glimpse of our comprehensive 60-page inaugural edition.



Why Now is the Ideal Time for VMF's Strategic Asset Allocation

We stand at a critical market juncture. For years, inflation remained low, and interest rates were subdued. Today, that’s rapidly changing. Short-term interest rates are surging, and inflation is not only rising but also becoming more volatile. Beyond these turbulent economic trends, the world itself is in flux. Globalization is retreating, political landscapes are increasingly fragmented, and disruptive technologies are reshaping established business models.

Relying solely on historical data to guide your investments in such a volatile environment is akin to driving a car using only the rear-view mirror—it sets you up for failure. Economic growth and inflation are becoming increasingly unpredictable, and correlations among asset classes are shifting dramatically.

We're experiencing seismic changes in geopolitics that directly impact globalization trends and supply chain dynamics. Add to that potential supply shocks in natural resources and a rapidly aging demographic. All these factors compounded signify that the traditional approach to asset allocation is becoming increasingly precarious.

In this complex backdrop, our proprietary Investment Process truly shines. It provides a disciplined methodology for navigating these variables and uncertainties. Our approach equips you with an expanded opportunity set and the agility to pivot when market dynamics dictate.

The current environment definitely favors our approach.

At VMF Research, we are on a mission to arm you with the tools and insights required to navigate these turbulent financial waters. Our commitment to enhancing your financial literacy is unwavering. Let us help you find your edge.



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