October 02, 2022

All investors face capital-market risk. Managing that risk, evaluating opportunities in the context of an investor’s goals, and assessing specific investments efficiently requires broad, objective, close-to-the-capital-market thinking. The LJE Asset Allocation Process summarizes in a logical and consistent way the investment choices recommended by our assessment of the coming economic environment. Second, we strive to provide in straightforward, plain English an explanation of our views and the rationale for the tilts to the portfolio. Our estimate of a 46% likelihood of bonds outperforming U.S. equities. Hence, our model prescribes a decrease in the portfolio’s fixed income exposure relative to the benchmark. The allocation to fixed income decreases to 36.22% versus a 40% benchmark allocation. The equity allocation between domestic and international stocks is driven by the likelihood of foreign stocks outperforming domestic stocks. Collectively, we estimate the likelihood of international stocks outperforming the U.S. to be 52.30%. Thus, an increased exposure to international equities at the expense of domestic stocks is warranted this quarter. The decreased allocation to fixed income, and the increased allocation to the international component of the portfolio yields a slight increase in exposure to the domestic stocks in the portfolio. The strategy increases the allocation to domestic stocks to 30.42% relative to its 30% benchmark allocation. Overall, the equity allocation to domestic and international equities increases to 63.78% from a benchmark allocation of 60%.

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