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Sunday, March 6, 2011

Asset Allocation Model Update - March 2011

Since we have seen a particularly large run up following the last update of the asset allocation model, I thought it would be wise to assess what it is currently saying while the market seems to have stalled for a bit under the weight of both its own advance and a spike in oil prices due to the Middle East coming apart at the seems. 

While the allocation signal has shifted slightly away from stocks, it has not yet crossed the threshold to indicate that you should start moving into bonds. Part of the reason it has not yet shifted from the 80/20 split that we have seen for more than a year is that bonds yields became so depressed that they still have not normalized even after a serious drubbing since August. Bear in mind, this model is not necessarily a predictor of stock market returns in the aggregate, but rather where you should be positioned in stocks vs bonds. As of right now, it is still giving very favorable readings for stocks, though not nearly as favorable as in the summer of last year.

Incidentally, in July and August of last year, the model registered some of the strongest positive readings for a heavy stock allocation that the model has ever produced. Indeed, the reading given was just as strong as in March of 2009, indicating that stocks were poised to dramatically outperform bonds. 

It is gratifying to know that the big call has panned out correctly, especially since things looked a little hairy at the lows there. Barring dramatic global upheaval, which isn't a great bet these days, I would expect stocks to continue to modestly outperform bonds from now through the end of the year. 

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