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Rumpel Wise thinking. I think you have a couple of issues you need to bear in mind. The world is fundamentally broken. And most models you will read about were

Rumpel Wise thinking. I think you have a couple of issues you need to bear in mind. The world is fundamentally broken. And most models you will read about were built for a different world. I suggested you read John Mauldin (a lot) his newsletter is at http://www.johnmauldin.com/outside_the_box.html http://www.johnmauldin.com/outside_the_box.html You need to now learn and understand about finance, what is wrong with the models and how to read the global environment. As an HNer you shd be able to do this. (You, for example, need to think about the liquidity you need) So rather than looking at a model, build up a picture of the world. That picture might probably be: * 10-15 yrs of misery in the US with choppy equity markets and an ever weaker dollar. Assume a deflation type scenario * Growth in China & Brazil but the danger of overeating * Climate change play: climate change play is clearly a good 20-30yr trend but there is reason to believe that with the PDO we will see global temperature anomalies drop for then next 10-12 yrs, so over that time frame there may be a contrarian play * Gold may be valuable but only to a point * And will successive US governments try to eviscerate the dollar, there isn;t much choice for other central bankers but to hold the dollar * Sovreign debt in Europe looks risky. With $5m you should aim for around 20-25 individual positions. Much of this can be done via ETFs with the right degree of portfolio balancing, and there are several services (which I can't vouch for) like alphaclone, which will help you do this. I would absolutely not follow the traditional route of the bulk of your assets follow US stock indicies--that worked in the post-baby boom years, don't think it would work now. However, I wouldn't understate the value of being able to get into a really good macro-oriented or special situations hedge fund. John Paulson's funds are a great example of this. They have returned 16-17% pretty consistently with a few bad years for 20 yrs or so. Allocating $500k into something like that is probably not a bad idea. It is abosolutely worth you find a good financial advisor (Sanford Bernstein or similiar) and put some of your assets with them to get access to their research & network. Your test should be: can they get me into a few reliable hedge funds, etc and do I get extra benefits. Yes: you pay 2% to get into a hedge fund, but if you get into a half decent one, you'll add a lot to your portfolio. In your position, my book would look like this: $1.5 - $2m into a variety of hedge funds and / or private equity positions (at least 7-8 very reputable ones $2m into a variety of ETFs ensuring you have good coverage of BRIC and non-US markets $1m in liquids (USD, NOK, other strong currencies) You should plan to spend at least 1.5 days a month reviewing your portfolio, some of which will be daily reading of good business websites (NOT MARKETWATCH! or CRAMER). Plan on rebalancing no more than half-of your positions a quarted, any more than that and the markets are nuts or you have a trigger finger. Because ETFs are liquid you can get in and out when you like, with some price risk. So if you need to hire a private jet and take your friends to Ibiza, you can. Above all: trust no-one. Equip yourself to make your own decisions.

nostrademons 17y ago
I personally agree with much of your picture of the world, but I'd like to point out that building up a single picture of the world and investing based on that exposes you to a lot of risk that your model is wrong. And over a 20-30 year timespan, virtually all models of the world are wrong. The world is just too complex to model effectively: you're at the mercy of black swan events that completely invalidate all of your assumptions. I'd also take issue with your advice to put your money into hedge funds or private equity. There is little reason to believe that the average hedge fund manager will outperform the market, because they are the market. By definition, the average fund manager gets average performance (actually slightly less than average, because investing returns are a skew distribution where the best hedge funds get outsize returns and there's a long tail of slightly-below-average funds to compensate). The best fund managers will outperform the market by a large margin, but you have no reason to believe that you'll be able to pick the best funds. You have less information available in choosing a fund manager than you do in choosing individual stocks. Past performance doesn't cut it - you might be looking at the particular fund simply because they have randomly beaten the market over 20 years. And you'll get eaten alive by the fees, which are the one predictable part of the financial industry.
- azeemazhar2 17y ago
  Good points. I ought to clarify: back to the idea of rebalancing. It is really about checking your assumptions and trimming your sails a few times a year. As to fund managers: i think that is the case with mutual fund managers. But it certainly isn't the case with hedge funds or VC. VC for example guarantees you will lose money uness you chose a handful of funds whose identity you know a priori. As for hedge funds--they cover a broad church--of which two remain specially interesting: Special situations/global macro -- where you need to know and understand a manager (who is essentially a business man) and find someone who has decent risk management in place as well as a really good investment process.I like Paulson for this. The second interesting area is the the high frequency systematic trading if highly liquid instruments (CTAs, if you will) which have a very different risk/return profile especially in chop markets and actually have a distribution benefit. Eaten alive isn't very precise--you can actually model your fees and work out how much of you will be eaten.

nostrademons 17y ago

I personally agree with much of your picture of the world, but I'd like to point out that building up a single picture of the world and investing based on that exposes you to a lot of risk that your model is wrong. And over a 20-30 year timespan, virtually all models of the world are wrong. The world is just too complex to model effectively: you're at the mercy of black swan events that completely invalidate all of your assumptions. I'd also take issue with your advice to put your money into hedge funds or private equity. There is little reason to believe that the average hedge fund manager will outperform the market, because they are the market. By definition, the average fund manager gets average performance (actually slightly less than average, because investing returns are a skew distribution where the best hedge funds get outsize returns and there's a long tail of slightly-below-average funds to compensate). The best fund managers will outperform the market by a large margin, but you have no reason to believe that you'll be able to pick the best funds. You have less information available in choosing a fund manager than you do in choosing individual stocks. Past performance doesn't cut it - you might be looking at the particular fund simply because they have randomly beaten the market over 20 years. And you'll get eaten alive by the fees, which are the one predictable part of the financial industry.

azeemazhar2 17y ago
Good points. I ought to clarify: back to the idea of rebalancing. It is really about checking your assumptions and trimming your sails a few times a year. As to fund managers: i think that is the case with mutual fund managers. But it certainly isn't the case with hedge funds or VC. VC for example guarantees you will lose money uness you chose a handful of funds whose identity you know a priori. As for hedge funds--they cover a broad church--of which two remain specially interesting: Special situations/global macro -- where you need to know and understand a manager (who is essentially a business man) and find someone who has decent risk management in place as well as a really good investment process.I like Paulson for this. The second interesting area is the the high frequency systematic trading if highly liquid instruments (CTAs, if you will) which have a very different risk/return profile especially in chop markets and actually have a distribution benefit. Eaten alive isn't very precise--you can actually model your fees and work out how much of you will be eaten.