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.