[jhulla]

Asset diversification is more complicated than that. To a first order, yes stocks and bonds are inversely correlated. But it is not enough to hold just stocks and bonds.

In order to maximize return over your preferred time frame (while minimizing risk), you have to examine the whole universe of investable assets, examine their volatility as well as correlations amongst themselves.

From there, your goal is to assemble an ideal basket of assets maximizes your return for your personal level of risk. Running these filters and choosing when to rerun/rebalance is the basis of modern portfolio theory.

Managing your money using MPT is the service that many investment houses sell. Rolling your own is absolutely possible, but it is not as simple as stocks vs bonds.

[svachalek]

Stocks and bonds being inversely correlated is an old rule that hasn't held as true since the 2008 crisis. Stocks, most bonds, and most other asset classes have been moving up and down together although with different degrees of volatility. Long term US treasuries are a standout as one of the only investments that has a clear inverse correlation to the general pattern.

Having run a lot of simulations in determining my own portfolio I came to the conclusion that these things affected my returns, in decreasing order:

1. annual maintenance costs 2. tax effects 3. choice of index 4. diversifying beyond stocks/bonds

I imagine most people who aren't using a passive strategy can chop 1 - 1.5% off their costs just by switching to indexes, and the remaining optimizations will pale in comparison. But as the size of the portfolio increases the additional effort becomes worthwhile.

It's possible that over the long term the market will decouple again but keep in mind that most investment advice about "universal truths" about the "long term" are based on a little over 100 years of market data. Given that I started investing at age 20 and will hopefully live to old age, that's not a lot of training data in comparison to the amount of prediction it's generating.

[infinite8s]

True, but for most people without 25M (ie most of us), is the arginal improvement in return on a 500k investment worth the extra complexity over a straight stock/bond mix?

Unrelatedly, what are you thoughts on the permanent portfolio (if you've heard of it).

[j_lev]

Not sure if this was directed at jhulla (and actually I was about to ask it to svachalek).

25% in physical PMs is hard to justify but generally speaking I think Browne's Permanent Portfolio is a good base. Perhaps 20% each of domestic equities, international equities, PMs, cash and long term bonds would be more realistic, with rebalance bands at 17/23.