The Traders Journal

My Methodology Allocation Beats Asset Allocation: Part II - Questions Answered

Gatis Roze

Gatis Roze

Author, Tensile Trading: The 10 Essential Stages of Stock Market Mastery

There’s nothing like teaching a seminar to fifty sharp investors on this topic and having them demand more clarity and specifics to encourage one to do the same for my blog readership.   To bring you up to speed, please read my previous blog on this subject.

I think clarity and specificity are best served here if I use the question and answer format that worked so well in the seminar.  

Question:  You have presented us with your 20 asset baskets.  How did you come up with these particular groupings?

Answer:  These baskets of assets are very personal.  After decades of investing, I know what I wish to invest in and what I don’t.  For younger investors who are in the process of assembling their own assortment of baskets, I’d suggest three sources that have segmented the entire stock market and grouped ETFs and mutual funds accordingly.  They will provide you with a wonderful and logical array of options to consider. 
A)    The American Association of Individual Investors (AAII) has an annual guide to the top mutual funds.  Focus on their groupings, not individual funds.

B)    Morningstar publishes the Fund Investor both in monthly hard copy as well as an online version at  Their groupings differ from the AAII.

C)    The same is true for Morningstar’s ETF Investor publication.  Try your local library or the free online features.  Don’t forget to also check if your brokerage house offers Morningstar.

Question:  Your assortment of asset baskets has some obvious omissions, such as no REIT and Energy buckets.  Why is that?

Answer:  Back to what I said earlier, these asset baskets are very personal.  You need to customize your assortment to match your individual circumstances.  I do not own stock market real estate (REITs) or stock market energy because I have chosen to invest in these areas directly and not by using stock market equities.  That’s a personal choice that may not be appropriate for you.

Question:  How did you decide 20 baskets was the right number?

Answer:  Without getting into math and statistics, I’m old enough to have been convinced that diversification is endowed in part with some of the same magic that Warren Buffett claims about “the wonder of compounding”.  Diversification allowed me to sail through the turndown of 1987, 2001 and 2008.  For me, 20 baskets provide the statistical diversification I demand.

Question:  You showed us this 10-year correlation matrix for which you had calculated all the correlations between every pair of all 20 of your asset baskets.  How did you do that and why?

Answer:  Fortunately, there are good tools available on the Internet to facilitate this.  If you search “Stock Correlation Calculator” on Google, one of the options you get is on  They’ll let you easily enter two symbols – whether they’re stocks, ETFs or mutual funds – and then you can select whatever time period you like  (10 years, for example).  The correlation will be then be calculated for you.

The reason I calculated correlations amongst all twenty of my asset baskets is because of my diversification objective.  For example, in my ‘All World Basket’ (excluding USA),  I use Vanguard’s ETF with the symbol VEU.  In my Biotech Asset Basket, I use Vectors Biotech ETF, with the symbol BBH.  The 10-year correlation between these two baskets is only 0.55, and they also have different betas in up and down markets.  

Some baskets actually have negative correlations.  This is why investing in multiple baskets with a correlation of 0.99 offers you only a false sense of security and not true diversification.  This is also why I have no trouble sleeping at night.  My investment eggs are strategically spread out amongst my twenty asset baskets.

Question:  How do you decide your specific allocation amongst the twenty baskets?   

Answer:  First and foremost, let me convince you that how you allocate, adjust and monitor your twenty asset baskets will have an immense financial impact on your year-end bottom line.  My point being that this is a very, very high leveraged activity on your part as an investor.  So much so that I would be willing to wager that individual investors who focus diligently on asset allocation will statistically outperform their stock-picker brethren and achieve superior financial results.  Moreover, they’ll do so with less volatility, smaller drawdowns and much less stress at the same time.

Think about it.  Once you’ve identified your twenty asset baskets and the best vehicles in each basket – be they ETFs or mutual funds – then you are essentially focused entirely on this very manageable collection of 20 baskets and not the infinite universe of individual stocks. 

Question:  How do you adjust and monitor those allocations?

Answer:  It’s done with the help of a relatively basic spreadsheet that I created.  I know what my 20 asset baskets are.  I decide how much money will be collectively allocated amongst these 20.  I have a ‘fixed mix’ allocation that I am comfortable with which I  have calculated for each of the 20 (i.e. for the International Small Caps basket, it’s a 7.5% allocation.)  In other words, in a fixed mix market, I would maintain 7.5% in International Small Caps, but in reality I flex funds around that number based on the present market’s favor or disfavor for that particular asset basket.  My target allocation for any asset basket will be either above or below that fixed mix target based upon what the market is telling me.  My job then becomes one of merely flowing money in and out of the 20 asset baskets using my favorite (the best) ETFs or mutual funds for each basket. 

At the risk of losing my readership with long blogs, I will sign off now and continue with Part III next week.  I do feel very strongly that this topic offers investors a high leverage tool kit which they can use to significantly improve their returns.  It’s also clear that one or two blogs doesn’t allow us to get our arms around this, so tentatively I’m thinking about offering a six-hour seminar in the future.  Check back!

I’ll continue this discussion with you next week.

Trade well; trade with discipline!
-- Gatis Roze 

Click here to see the final article in this series.

P.S. Click HERE for information on my future appearances & seminars.

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Gatis Roze
About the author: , MBA, CMT, is a veteran full-time stock market investor who has traded his own account since 1989 unburdened by the distraction of clients. He holds an MBA from the Stanford Graduate School of Business, is a past president of the Technical Securities Analysts Association (TSAA), and is a Chartered Market Technician (CMT). After several successful entrepreneurial business ventures, Gatis retired in his early 40s to focus on investing in the financial markets. With consistent success as a stock market trader, he began teaching investments at the post-college level in 2000 and continues to do so today. Learn More