Market asset class allocations - there is no best

Thinking through the asset allocation decision has to start with some benchmark; however, there is no conventional approach to determining a baseline. This becomes especially difficult once you move beyond the simple 60/40 stock bond approach. You can easily argue for more diversification through holding more sectors, but the actually number and weights become difficult to explain.

If you look at the total market capitalization between stock and bonds across the globe, you will find that bonds make up about 70+% versus just over 25% for equities. The bias should be to hold more than 50% bonds in a base portfolio. In the US, the bias to bonds relative to stocks would be approximately 60/40 in favor of bonds. The US represents just over 26% of total bond capitalization and 44% of total equity capitalization. Any investor should hold more international assets.

There has been an argument that a good allocation approach is to weight equity markets by the size of their GDP; however, there is a significant difference between market capitalisation and GDP as seen in the graph below.

The market capitalization is biased toward momentum in stock markets. Those stock markets that are performing better will get larger allocations over time. The closet momentum allocation procedure should cause some concern for investors although it is consistent with the idea of holding momentum stocks.

If there is no easy answer, no problem just do what is comfortable and offers good diversification.  Just accept that your baseline may not match the consensus and this will need some explaining when under performs occurs.