Position Sizing Is Key To Asset Allocation

Includes: BOND, GLD, IAU
by: Roger Nusbaum

There was an article in the Wall Street Journal on Wednesday morning about the rough month for Bill Gross's PIMCO Total Return Fund (NYSEARCA:BOND). The Journal notes that the fund is down 3.65% MTD and blames the result on the fund's position in US Treasuries. It is an important point of understanding that during a stretch when a particular segment, like bonds or precious metals, is doing poorly, then just about every fund in that segment is also likely to do poorly.

Gold and silver have had a rough few months, so logically the physical ETFs and associated miners are also having a rough few months. Ditto emerging markets and bonds. If every emerging market country fund is declining, then finding the few individual stocks swimming against that tide is a low probability.

As part of a recurring theme from posts during this market event (and probably every market event since 2004), these things come along every now and then. In the past they've hit CanRoys, REITs, MLPs, emerging markets, bond funds, currency funds, precious metals, specific equity sectors and of course broad equity indexes. And of course they will all have their turn in the negative spotlight again at some point in the future.

It is times like now why I have been very consistent over the years of wanting no more than low single digit exposure to gold. Plenty would have us put 20% in gold. Gold is an important asset class (in my opinion) but at some subjective portfolio weighting, it goes from portfolio insurance (the reason we use it) to a point of very concentrated risk. Proper sizing for every type of asset you choose to own is crucial for navigating the most difficult parts of the market cycle.