The "Businessman's Risk" Portfolio ~ market folly

Monday, July 26, 2010

The "Businessman's Risk" Portfolio

Earlier today we highlighted market strategist Jeff Saut's thinking that it may be time to rebalance portfolios. Within his commentary, he laid out a theoretical asset allocation as to how he would structure a "businessman's risk" portfolio. When Saut first entered the industry 40 years ago, his mentor told him to allocate 20% of money to Treasuries, 20% to stocks, 20% to bonds, 20% into precious metals, and 20% into real estate. Saut did not heed this advice though admits that over the long haul it has performed decently. Instead, Saut has constructed the aptly named "businessman's risk" portfolio which is more to his liking. Here's the breakdown:

50% Equities: For this portion of the portfolio, Saut favors emerging and frontier markets to developed markets. He targets international exposure using the MFS International Diversification Fund (MDIDX). For your US exposure, he feels large/mid caps are preferred over small caps and to favor growth over value.

15% Fixed Income: In this asset class, he prefers U.S. over non-U.S. exposure and corporates over treasuries. He recommends funds like Putnam's Diversified Income Fund (PDINX) for this allocation.

15% Cash: While this part of the portfolio is very low yield, it is a "safe place to wait for risk aversion to abate."

10% Commodities: He fancies an allocation to precious/base metals, soft commodities, and crude oil. For precious metals he likes the OCM Gold Fund (OCMGX) managed by Greg Orrell.

10% Alternative Investments: He utilizes this asset class purely for diversification purposes. This category encompasses numerous options ranging from real estate to private equity to managed futures. There are a myriad of ways to gain exposure and some ideas can be found in our hedge fund portfolio tracking series.

So there you have the "businessman's risk" portfolio. Keep in mind that this allocation doesn't seem to take into consideration age, retirement horizon, or other factors. Instead, it serves as a generic template for those willing to take on some risk. Determining and managing your risk tolerance is a very important aspect of portfolio management and you can view Jeff Saut's risk management principles for more on the subject. The portfolio above is certainly more risk tolerant, hence its name: the "businessman's risk" portfolio. Below is a graphic breakdown of Saut's favored asset allocation:

(click to enlarge)

For more from the market strategist head to his recent notion that it is time to rebalance portfolios.

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