I'm so on the other side of this it hurts.  So, either the economy is going to improve, get worse, or stabilize.  Who couldn't agree with that?

I read the stress free portfolio article and while it may be great advice, I don't think so.  First, it is too simple...different target date funds have different asset allocations within them.  Secondly, the most effective way to have a no stress portfolio IMO is to equalize your risk by leveraging it.  This is tough for us to do as retail, saving for retirement or retired working stiffs, but there is a lesson there.

Theoretically, (or practically for some pros with big money and the ability to do it), one can construct a portfolio to essentially take the risk out of it no matter what the economic environment by identifying what assets do well in any given environment, and then equalizing their risk through leverage, so for example, your emerging market equity risk would be the same as your treasury risk.

If the above is true, and I think it is, the articles advice is not great if the purpose is to reduce volatility and navigate uncertain waters as safely as possible.  Who could believe if the economy has worse news ahead, if there is any worldwide contagion, etc., that a 70, 80 or 90% equity indexed stake is a safe bet.  Slow growth, rising interest rates??

Alternative assets, absolute return strategies, some commodity exposure, etc. seem to me  necessary to be included in any asset allocation strategy.

Who knows, shoving it all into a total stock index fund, an intermediate bond index, and a little cash may work out ok, but IMO it is hardly the best way, (or the safest way) to get there.

arlo3k:

If the above is true, and I think it is, the articles advice is not great if the purpose is to reduce volatility and navigate uncertain waters as safely as possible.  Who could believe if the economy has worse news ahead, if there is any worldwide contagion, etc., that a 70, 80 or 90% equity indexed stake is a safe bet.  Slow growth, rising interest rates??

Alternative assets, absolute return strategies, some commodity exposure, etc. seem to me  necessary to be included in any asset allocation strategy.

Who knows, shoving it all into a total stock index fund, an intermediate bond index, and a little cash may work out ok, but IMO it is hardly the best way, (or the safest way) to get there.

Arlo3k, you made some valid points. Personally, I have a more conservative asset allocation that would be true for my target retirement date, so I tend to be more conservative than average.

Alternative assets are the classic way to hedge against inflation. However, they are NOT working at the moment. Commodities such as gold are depressed for some strange reason that defies logic (should be well over USD 2000/ounce, to track the drop in the dollar). Oil, etc. is difficult to invest in, except perhaps via collateralized commodity futures (CCFs) (or futures contracts), which, IMO, are not a good way because your actual investment is in either treasuries or TIPS. Energy stocks or an energy sector ETF is another way, but, again, this is not a good way either, as the gains passed on to the shareholders are determined by someone else, and are, to some extent, determined by the general stock market sentiment, not oil prices (same is true for precious metals stocks or sector ETF). And, we all know how terrible real estate is at the moment (we see the bad reports almost daily on the nighly news). TIPS are another way, but they have had a huge runup recently (buy high, sell low?), and only reflect a portion of total inflation (CPI does not include, for example, energy). I think all of the traditional alternative assets have been suppressed, so will not work, IMO.

I still think the best way is a simple strategy, but I could be wrong. A US stock market fund, an int'l stock market fund, a bond fund, and a money market fund (a.k.a. Taylor's famous 4-fund Boglehead portfolio) (or, a single target retirement fund to reflect your risk tolerance, not your retirement date) are pretty darned hard to beat, and a no-brainer to maintain. These are really the only asset classes we can control, to a small extent, as we have no control over most other things. If these four asset classes go kaput, all of the asset classes will go kaput, so we will all go kaput together. ;)

Who knows if this is a bear market rally, the beginning of the end, or the end of the beginning (George Orwell's doublethink, perhaps?)? If you're as confused as I am by the mixed signals, a good alternative is to say "I don't know," and diversify the unknown using US stocks, int'l stocks, bonds, and cash/money market. I think these four asset classes will work fairly well in either a bear or a bull market. The other major asset classes (real estate, commodities, etc.), IMO, are too interwoven with the classic four, and so all asset classes will tend to rise or fall together (different from past history). Not to mention globalization, where US and international stocks are starting to track each other, thus further increasing the correlations with each other.

Dan

Dan, I can understand your desire for simplicity. Generally, I applaud it because I think people clutter up their portfolio trying to hold too many things.
   However, in our current environment I think your plan is a huge mistake. Aren't you forgetting that there have been periods as long as 16 years - 1966-1982 - where the stock market went essentially nowhere and where you got creamed in bonds? I think we're in a similar situation now wherein investors who fail to take on considerable inflation protection will barely show positive results for the decade.
    Take your pick: energy, gold, timberland, commercial real estate (it performs differently than residential and is currently up for the year) or commodities. But pick one!
    Please don't tell me Morningstar has a clue about what is going on. They don't. They exist to sell you mutual funds. And their stock picking is dreadful. If  you doubt this then take a look at their 2008 Stock book in which they recommended Bear Stears as a buy at 70!  Similarly, they missed the entire subprime issue although it was well telegraped. This allowed them to recommend a stock like Radian givnig it 5 stars, totally missing the point that the company had changed its business plan from just insuring municipals (a safe bet) to making greedy bets by branching into insuring subprime issues. The stock collasped from 70 to 5 as a result.
    Maybe you are tired of playing the slice and dice game with so much in small cap international , so much in large cap value. I understand.
    But crazy as it sounds I agree that a portfolio with big chunks in emerging markets and some counterbalancing T bills will do better. Or a split like I'm doing equal amounts in inflation hedges and traditonal stocks.

Laksmi:

Take your pick: energy, gold, timberland, commercial real estate (it performs differently than residential and is currently up for the year) or commodities. But pick one!

Actually, I did consider inflation hedging, and picked one. I got into gold (the most classic hedge) with a small allocation, and it didn't work, so I abandoned the idea and cut my losses. In fact, after I got out, gold continued to plunge even further, even as inflation rose (inflation ran 10%-15% in 2007, and seems to be running in the double digits this year so far). What I was trying to explain in my post above is that the gold will not work as a hedge because the price is being suppressed. Traditional hedges like gold that worked during the Great Depression and during 1966-1982 will not work now unless the price is allowed to be unsupressed.

Energy? Traditional US and international stocks already have some exposure, indirectly, to energy, and a fairly hefty one at that (assuming an indexing strategy that tracks the markets), given the recent runup in oil prices. Trying to invest directly in energy is difficult at best, and risky. Unless you're a government or large corporation, you're basically out of luck. What if oil doesn't continue to rise? If it were to fall, you could lose a lot.

Commodities? I know that Larry Swedroe likes Collateralized Commodity Futures (CCFs) (PCRIX is one classic example), but these invest in treasuries and TIPS, not commodities themselves. Commodity related stocks (similar to energy stocks) are already included in US and international stocks.

Real Estate? Everything I read says values will continue to fall. Not to mention taxes, insurance, and upkeep expenses (I own some on the side, so I am familiar with the costs) will eat your lunch while the values continue to fall. Commercial real estate will also eventually fall if the economy slows down.

TIPS? TIPS are yielding under 1%, not counting the CPI adjustment, which only partially adjusts for inflation. Again, inflation is in the double-digits, whereas the adjustment is only a few percent at best. Not to mention that you would be buying high right now (other treasuries are very high right now also, BTW).

Foreign bonds/currency? The dollar's value is currently rising, so this is not working, at least at this moment. We cannot control or predict currency swings.

Emerging markets? They have had a huge runup recently. Will they continue to rise? Are you willing to make a bet on something that is expensive right now?

I just don't see any safe haven that will actually work if we are indeed in a bear market rally like Soros thinks. Even if you do try to hedge, I don't think it will work because of the globalization that has taken place, where the entire global financial system is interconnected and dependent. If a blue domino starts to fall, the red ones will fall, the green ones will fall, and the yellow ones will fall. Let's face it. The middle class is under full scale attack, as Lou Dobbs says. If we do go into a bear market, I think it will be difficult to find a way to protect yourself.

Dan

Ok, so rather than theory, here is what I'm doing.  In my retirement accounts:

Low equity exposure, in the low 30's percentile, (funds, not individual stocks) split roughly evenly between domestic and foreign, with slightly more domestic.  Fund examples,  FAIRX, TGVIX, FPRAX, VIG, XLG, SGOVX, and MDISX.  These are the largest holdings. 

Bonds, FPNIX, PTRAX, LSBRX, RPSIX,and LSGLX.  Again, in the mid 30's.

The rest, other than cash, is in PASAX, PAUDX, EAAFX (GMO), along with about 8 or 9%  split between SGGDX and DJP.  I also have around 4 or 5% in COSWF.PK, PVX, and FDG.

In taxable accounts, two MLP's, EPD and ETP, SWHEX, short muni funds and tax free mm funds.

This isn't everything, but a rough idea.  I wish I could leverage the risk, and if I could that's what I would do.  The only firm I know of that does this, (and do it really really well), is Bridgewater, but I think their minimum is around 100 million. Oh well.

Needless to say, these are not recommendations.  I do plan on increasing my equity percentage, just not now;

Oh yes, I am around only about 6 years away from retirement.  Cheers.