Jeremy Grantham's Personal Account

GMO's letters to clients are important reading for money managers: Jeremy Grantham's focus on asset allocation gives him broad perspective, and his track record is great. But fund managers rarely talk about what they are doing in their own personal accounts. That's why this comment in his Q4 letter (PDF) is particularly interesting:

We recommend as much avoidance of risk as is possible, given the constraints of career risk management; for one of the paradoxes of our business is that reducing or avoiding real risk in portfolios can seriously increase career and business risk, which rises with any deviation from standard behavior.  For global equities, the biggest portfolio risks are likely to come from any exposure to small cap and low quality, particularly those that are highly volatile and have high levels of debt.  This is likely to be particularly true in the US...

Perhaps not surprisingly, having a broad line of asset allocation strategies with different levels of aggressiveness gives rise to criticisms that if I believe the US market will go down, how can I with a clear conscience simultaneously be associated with a strategy like our global balanced strategy, which has over 25% in US stocks.  The point is that we cannot tell a client how much career risk to take and having absolutely no US stocks can often be extremely risky for a career or a business, for it is an uncertain world where almost anything can happen for a year or 2, and 2 years is a long time in investing.  Everyone’s situation and willingness to take risk is different.  For myself, in my own account, I am net short US stocks, but then I am confident I will not be fired and I can stand the lost opportunities of a rising market.  I know that to be true since I did have huge lost opportunities in 1998 and 1999.