Stock/Bond mix using Sharpe ratio

Daniel Morillo did an analysis here of the optimal stock/bond ratio over 10 year periods, using Sharpe Ratio as the determination of optimal.  The result seems intuitively obvious to me, in fact, nearly a required conclusion.  That is, the percent bonds increases in direct relationship with bond returns, almost to the exclusion of stock returns.  I think this is a mathematical artifact of the definition of the analysis.  See these two graphs:



It is interesting that the overall “optimal” percent was 43% bonds.

Dorsey-Wright looks at this study and concludes:

In some 10-year periods it was best to have 90% allocation to bonds and in other 10-year periods it was best to have 0% allocation to bonds!  While some may look at this study and conclude that there is no need to be tactical, I look at this study and come to the exact opposite conclusion.

What I am wondering is, what does this say about how likely one is to meet their financial goals?  I don’t think it really addresses that question at all.  I find it especially frustrating that both blog posts seemed to find the idea of asset allocation begins from the assumed starting point of 60/40.  There is no discussion of investment horizon, or investment results.  The whole 60/40 thing, I think, is more about career risk than any risk associated with the client’s investments or goals.


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