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2019 Asset Allocation: Working With Optimizer | Seeking Alpha

How does one combine the power of the Dashboard and the Hoadley optimizer when it comes to
setting up an asset allocation plan for a portfolio? ITA readers are familiar with the Dashboard as it
is shown every time a portfolio is updated. In this post I will explain how one might combine the
Dashboard and Hoadley optimizer. Since the Hoadley optimizer is confined to nine (9) asset classes,
I’ve chosen to break the market down into the following asset classes: Large-Cap, Mid-Cap, Small-
Cap, Bonds, Developed International, REITs, Emerging Markets, Commodities, and Precious Metals.
This is a major reduction from the 17 or 18 asset classes we use with the Dashboard. Here is an
example of the percentages one might assign to each of these nine asset classes.

1. Large – Cap (NYSE:LC) – 12%

2. Mid-Cap (MC) – 10%
3. Small-Cap (SC) – 8%
4. Bonds – 15%
5. Developed International – 15%
6. REITs – 20%
7. Emerging Markets – 10%
8. Commodities – 5%
9. Precious Metals – 5%

This allocation plan gives us the 30% in U.S. Equities and 20% in REITs recommended by David
Swensen. We are a little light on bonds and a little heavy with our international markets allocation.
Also, Swensen did not include commodities and precious metals in his “Swensen Six” portfolio.

When using an optimizer such as the Hoadley, it makes good sense to include constraints or collars
around each asset class. We do the same when we assign a threshold percentage to each asset class
in the Dashboard. I’ve been experimenting with 40% constraints around each of the nine asset
classes. For example, Large-Cap stocks are targeted at 12%. A 40% constraints works out to be
0.40 x 0.12 = 4.8% or rounded to 5%. We can set constraints for LC to be 17% on the high side
and 7% on the low side. If those thresholds seem too large, then round down to 4%. I prefer to
provide a little more room for the optimizer to do its work so long as the end portfolio is not
completely irrational.

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