>ASSET ALLOCATION THOUGHTS

"Let every man divide his money into three parts, and invest a third in land, a
third in business, and a third let him keep in reserve."

-Talmud, circa 1200 BC - 500 AD1

This letter is the start of a process we will, in the future, develop into a more useful and
practical asset allocation framework for investors’ portfolios that reflects our macro view,
concerns about the general riskiness of the financial world and a variety of issues that go into the
asset allocation process.

As a starting point, it is important to understand what real long-run rates of return have
been for different assets.2 Good data exists on developed country equity markets by sector and
on real estate. For example, most people know that the real long-run return on U.S. equities is
about 6.5%. Small-cap stocks outperform large companies by a wide margin, value stocks
outperform growth stocks, also by a wide margin, and small value stocks easily outperform small
growth stocks. However, small companies have much greater volatility and business risk.

It is also well known that the real return on bonds lags the real return on stocks, but risk is
much less. In a portfolio, the inclusion of some bonds along with stocks lowers risk faster than it
lowers returns up to a point.

To read the full report: ASSET ALLOCATION