How do I assign assets

How do I allocate alternative assets?

Yes, there are many rules of thumb, but almost all of them are bad. The big problem is that the efficient bounds theory is pretty good, but as you noticed, it is extremely sensitive to the inputs. Since the (medium-term) future in the financial sector often looks very different than in the past, the inputs are often wrong and lead to extreme portfolios. This is one of the toughest questions in finance.

Some effort has been made to address this uncertainty. Bayesian portfolio optimization, mini-maxing, and risk parity are some suggested solutions, but all have similar sensitivity problems. Hedge funds sometimes use interesting, more complicated methods, but generally have very specialized portfolios, and these methods generally do not apply.

Frankly, even at the highest level, finance professionals often start with a proven portfolio like the 60/40 with a risk profile that they are familiar with. Then they add varying amounts of additional investments that they believe will add value. See how your portfolio would have changed over the past periods and in different stress scenarios until you are satisfied with the risk and return that these investments would add.

For example, on my own portfolio, I looked at gold and found that the returns are extremely uncertain and theoretically dubious, and found that it had no place in my portfolio. However, I found that REITs have had a rough patch lately, but reasonable expected returns with a risk profile similar to my equity exposure. After a series of historical reviews, REITs found a small allocation in my overall portfolio that replaced part of the equity component.

The Vanguard link above is great read for learning more.


This research is certainly interesting! Thank you for sharing.