A multiple asset class approach to investing can give investors a realistic probability of being profitable in all market conditions.

Limitations & Real World Application Of Study Results

The purpose of this study is not to suggest that using this approach is the only way to successfully invest, but to illustrate that the vast majority of investors could benefit from investing in a widely diversified portfolio or hiring a manager who can build and manage a widely diversified portfolio for them. While the financial markets have proven time and time again that there is no magic formula for investment success, the concept of diversification into a wide array of asset classes, including some with low or negative correlations to U.S. stocks, combined with the concept of tweaking the allocation based on the outlook for the economy and financial markets, appeals to an experienced investor's common sense.

2008: Information about managing multiple asset class investment portfolios can be found in Multiple Asset Class Investing: Strategies for Inflation, a Weak U.S. Dollar, and Principal Protection

Historical Performance vs. The Real World

Obviously, the next bear market and subsequent bull market in U.S. stocks will be different from the most recent cycles. The CCM Portfolio Management Strategy was developed with a respect for Mark Twain's way of looking at history: he stated,

"The past does not repeat itself, but it rhymes."

The future will not be exactly the same as the past, but there will be meaningful similarities. The CCM Portfolio Management Strategy is based primarily on how asset classes, not individual stocks, performed under different economic and market conditions. This should make the results more relevant than if we studied how Microsoft's stock performed under the same conditions since individual stocks can be influenced by company specific outcomes (earnings disappointments, fraud, credit ratings, analyst recommendations, etc). The strategy can also be adapted to changing conditions by adjusting the composition of the model growth portfolios. Even if conditions warranted a change to the model portfolios, the basic theory of how to manage a multiple asset class portfolio would remain intact.

A common criticism of any study of historical asset class correlations is to point out that none of us know which asset classes will be the winners in the future. While that criticism does hold water, many of the asset class correlations presented here should remain relevant in future economic cycles. For example, the odds are extremely high that bonds will be more desirable in an environment where the Federal Reserve is lowering interest rates (the Federal Funds Rate). Conversely, in the future, the odds are good that bonds will be less attractive under conditions where the Federal Reserve is raising interest rates. The odds are also reasonable that commodities will be more attractive in periods of economic expansion and they will be less attractive in periods of economic contraction.

A multiple asset class approach to investing is an excellent way to prepare for the fact that none of us know which asset classes will be the winners in the future. By having exposure to low or negatively correlated asset classes, an investor will, in theory, always have some winners in their portfolio. A prudent investor can then decide if he or she wants to increase their exposure to the winning asset class in the early stages of a bull run. If we use gold as an example, an investor who had a small exposure to gold (even as low as 1%) would have been one of the first to notice and profit from the gains in early 2001. As a result, they could have made small incremental increases in the position as it continued to be profitable. On the other hand, a one or two asset class investor, using primarily stocks and bonds, may not even have heard about gold's big move until it had already gone from under $300 to over $500. Having multiple asset classes in your portfolio, even in small amounts, enables you to be early to many of the investment parties. It also helps you keep an open mind about where to allocate your assets. It is human nature to defend the asset classes that are in your portfolio and dismiss the ones that are not. How many people told themselves "gold is not a good investment" as it moved higher while they remained on the sidelines. For those of you that did not have gold on your radar, the trailing five-year average annual return for precious metals funds is 35.08%. That sounds like a pretty good investment to me when the objective is to make money.

The beauty of this strategy is that it can also help you cut back weakening positions. As a multiple asset class investor, I am happy to peel off some profits in profitable assets classes during periods of weakness, like gold in May of 2006, and redeploy the money to an asset class that may be more attractive. Using this approach, I don't really care which asset classes are making money. My goal is to ride the long-term winners and cut back on the long-term losers based on all the fundamental and technical information that is available. Imagine the results if you had used this approach to help you slowly shift away from technology stocks in 2000 towards a larger position in commodities. In over simplified terms, you would have slowly decreased your exposure to tech stocks because they were going down and slowly increased your exposure to commodities because they were going up.

A multiple asset class investor must also be open to adding new asset classes to the portfolio from time-to-time based on changing market conditions and trends. For example, gold might not have been in a multiple asset class portfolio in the late 1990s due to its poor performance from 1988 to 2001. A student of the markets would have seen gold moving up in the asset class rankings in 2001 and 2002. Under this strategy, gold would have been at least considered and monitored as a possible new addition to a multiple asset class portfolio. Similarly, technology stocks would have been in the mix in the 1990s. As prices of tech stocks fell and the fundamental outlook was less than encouraging, an investor may have dropped them from the portfolio. Flexibility and an open mind are important elements to successful implementation of any investment strategy.

Accounting For Differences Between
The Present and The Past

A portfolio manager must be able to put what happened in the past into the context of what conditions are present today. Using interest rates as an example, since inflation is presently above the Federal Reserve's stated comfort zone and the U.S. dollar has been weakening, it is prudent to assume that the next rate reduction cycle by the Federal Reserve will most likely be shorter in duration (number of months) and lesser in magnitude (rates won't fall as far as they did in the last cycle). While headline inflation numbers will show some improvement during the next economic contraction, future economic stimulus in the form of lower interest rates will be more likely to rekindle inflation. Said another way, the Federal Reserve most likely has less wiggle room to tinker with interest rates on the downside than they did during the last cycle of accommodative policy. Lower interest rates will also put some additional downward pressure on the U.S. dollar. A weakening U.S. dollar also makes U.S. Treasury Bonds less attractive. In the current context, the portfolio manager may consider cutting their exposure to long duration U.S. Treasury bonds earlier than the historical data from the last economic contraction would suggest. This is just one example of how a portfolio manager might tweak the portfolio's allocation using more information than just historical precedent.

The Possibility Of Future Deflation - Adjustments To CCM Model Portfolios

One scenario that would require adjustments to the Model Economic Expansion Portfolio and Model Economic Contraction Portfolio would be if we entered a period of deflation in the United States. However, the same basic portfolio management theory would still be relevant using the updated model portfolios. Understanding the history behind inflationary and deflationary environments is important to any investor. More information on this topic can be found here:

Is multiple asset class investing the cure for all your investment worries? We all know that no such cure exists. However, research shows that there may be a better way to build a portfolio of investments that offers real diversification and an opportunity for improved returns.


Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at

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