Asset Allocation has always been a puzzle for me. All the financial advice says your asset allocation depends on your risk tolerence and age, but thats about it. I stumbled across this paper which gives some ideas on how to determine what a good target allocation would be based on your opinion of future inflation.
Now this paper is pretty heavy reading – lots of numbers and ration and analysis. So I will preview my favorite chart in the article:
The gist of this is, as your inflation expectation increases, the article suggests you should increase your investment in equity REITs, as they have the best ability to increase prices along with inflation. This article was published in 2011, so it doesn’t factor in the huge runup REITs have seen. I would also of liked to have seen commodities split out in a more granular way – perhaps comparing oil vs copper vs farm products, but it is an interesting alternative way to consider asset allocation.
If this is a topic of interest, this article is definitely worth a look.