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package/.claude/skills/portfolio-manager/references/asset-allocation.md

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+# Asset Allocation Framework
+
+This document provides comprehensive guidance on asset allocation principles, target allocations by risk profile, and rebalancing triggers for portfolio management.
+
+## Core Principles
+
+### 1. Asset Allocation Drives Returns
+
+Academic research shows that asset allocation accounts for approximately 90% of portfolio return variability over time. Security selection and market timing contribute far less to long-term outcomes.
+
+**Key Insight:** Getting the allocation right is more important than picking individual stocks.
+
+### 2. Diversification Across Asset Classes
+
+Different asset classes have different risk-return characteristics and respond differently to economic conditions:
+
+| Asset Class | Expected Return | Volatility | Purpose |
+|-------------|----------------|------------|---------|
+| **Stocks (Equities)** | 8-10% | High (15-20%) | Growth, long-term appreciation |
+| **Bonds (Fixed Income)** | 3-5% | Low (3-6%) | Income, capital preservation, volatility dampening |
+| **Cash & Equivalents** | 1-2% | Very Low | Liquidity, stability, opportunistic deployment |
+| **Real Estate** | 6-8% | Medium (10-15%) | Income, inflation hedge, diversification |
+| **Commodities** | 4-6% | High (15-25%) | Inflation hedge, diversification |
+| **Alternatives** | Varies | Varies | Non-correlated returns, risk management |
+
+*Note: Returns are historical long-term averages and not guaranteed. Actual returns vary significantly.*
+
+### 3. Risk Tolerance Alignment
+
+Asset allocation should match investor's risk tolerance and time horizon:
+
+- **Risk Capacity:** Financial ability to withstand losses (net worth, income stability, time horizon)
+- **Risk Tolerance:** Emotional ability to withstand volatility (behavioral, psychological)
+- **Risk Requirement:** Return needed to achieve financial goals
+
+Optimal allocation balances all three factors.
+
+## Asset Allocation by Risk Profile
+
+### Conservative (Capital Preservation)
+
+**Investor Profile:**
+- Age: Typically 60+ or near retirement
+- Time Horizon: 0-5 years
+- Primary Goal: Preserve capital, generate income
+- Risk Tolerance: Low - cannot afford significant losses
+- Volatility Tolerance: Minimal (<5-8% annual drawdown)
+
+**Target Allocation:**
+- **Stocks:** 20-40%
+  - US Large Cap: 15-25%
+  - US Small/Mid Cap: 0-5%
+  - International: 5-10%
+- **Bonds:** 50-70%
+  - Investment Grade Corporate: 20-30%
+  - Government Bonds: 20-30%
+  - High Yield: 0-10%
+- **Cash:** 10-20%
+- **Alternatives:** 0-10%
+
+**Sector Guidelines (Equity Portion):**
+- Defensive sectors: 60-70% (Utilities, Consumer Staples, Healthcare)
+- Cyclical sectors: 30-40%
+- Avoid: High-growth tech, speculative stocks
+
+**Expected Outcomes:**
+- Annual Return: 4-6%
+- Max Drawdown: -10 to -15%
+- Recovery Time: 1-2 years
+
+### Moderate (Balanced Growth & Income)
+
+**Investor Profile:**
+- Age: Typically 40-60
+- Time Horizon: 5-15 years
+- Primary Goal: Balanced growth and income
+- Risk Tolerance: Medium - can handle moderate volatility
+- Volatility Tolerance: Moderate (10-15% annual drawdown)
+
+**Target Allocation:**
+- **Stocks:** 50-70%
+  - US Large Cap: 30-40%
+  - US Small/Mid Cap: 10-15%
+  - International: 10-15%
+- **Bonds:** 25-40%
+  - Investment Grade Corporate: 15-25%
+  - Government Bonds: 5-10%
+  - High Yield: 5-10%
+- **Cash:** 5-10%
+- **Alternatives:** 0-10%
+
+**Sector Guidelines (Equity Portion):**
+- Defensive sectors: 40-50%
+- Growth sectors: 30-40% (Technology, Communication, Consumer Discretionary)
+- Cyclical sectors: 20-30% (Industrials, Financials, Materials)
+
+**Expected Outcomes:**
+- Annual Return: 6-8%
+- Max Drawdown: -15 to -25%
+- Recovery Time: 2-4 years
+
+### Growth (Long-Term Capital Appreciation)
+
+**Investor Profile:**
+- Age: Typically 30-50
+- Time Horizon: 10-25 years
+- Primary Goal: Long-term wealth accumulation
+- Risk Tolerance: Medium-High - can withstand volatility for higher returns
+- Volatility Tolerance: Significant (15-20% annual drawdown)
+
+**Target Allocation:**
+- **Stocks:** 75-90%
+  - US Large Cap: 40-50%
+  - US Small/Mid Cap: 15-20%
+  - International: 15-20%
+  - Emerging Markets: 5-10%
+- **Bonds:** 10-20%
+  - Investment Grade Corporate: 5-10%
+  - High Yield: 5-10%
+- **Cash:** 2-5%
+- **Alternatives:** 0-10%
+
+**Sector Guidelines (Equity Portion):**
+- Growth sectors: 45-55% (Technology, Healthcare, Communication)
+- Cyclical sectors: 25-35%
+- Defensive sectors: 20-30%
+
+**Expected Outcomes:**
+- Annual Return: 8-10%
+- Max Drawdown: -20 to -35%
+- Recovery Time: 3-5 years
+
+### Aggressive (Maximum Growth)
+
+**Investor Profile:**
+- Age: Typically <40 or high net worth with long horizon
+- Time Horizon: 15+ years
+- Primary Goal: Maximize wealth, comfortable with high risk
+- Risk Tolerance: High - can emotionally and financially withstand major losses
+- Volatility Tolerance: Very high (20-30%+ annual drawdown)
+
+**Target Allocation:**
+- **Stocks:** 90-100%
+  - US Large Cap: 40-50%
+  - US Small/Mid Cap: 20-25%
+  - International: 15-20%
+  - Emerging Markets: 10-15%
+  - Alternatives: 0-5%
+- **Bonds:** 0-10%
+- **Cash:** 0-5%
+
+**Sector Guidelines (Equity Portion):**
+- Growth sectors: 50-60% (Technology, Healthcare, Consumer Discretionary)
+- Cyclical sectors: 30-35%
+- Defensive sectors: 10-20%
+- May include speculative positions (small caps, growth stocks)
+
+**Expected Outcomes:**
+- Annual Return: 9-12%
+- Max Drawdown: -30 to -50%
+- Recovery Time: 4-7 years
+
+## Sector Allocation Guidelines
+
+### Defensive Sectors (Lower Volatility)
+
+**Utilities (3-5% of equity allocation)**
+- Characteristics: Stable cash flows, dividend-focused, regulated
+- Economic Sensitivity: Low
+- Use: Income generation, volatility dampening
+- Overweight when: Late cycle, high uncertainty, rising rates
+
+**Consumer Staples (5-10%)**
+- Characteristics: Steady demand, pricing power, recession-resistant
+- Economic Sensitivity: Low
+- Use: Stability, dividend income
+- Overweight when: Economic slowdown, defensive posture
+
+**Healthcare (10-15%)**
+- Characteristics: Demographic tailwinds, innovation-driven, essential services
+- Economic Sensitivity: Low to Medium
+- Use: Growth with defensive qualities
+- Overweight when: Aging demographics, innovation cycle
+
+### Growth Sectors (Higher Volatility, Higher Expected Returns)
+
+**Technology (15-25%)**
+- Characteristics: High growth, innovation-driven, secular trends
+- Economic Sensitivity: Medium to High
+- Use: Capital appreciation, secular growth
+- Overweight when: Economic expansion, innovation cycles, low rates
+- Caution: Concentration risk, valuation sensitivity
+
+**Communication Services (5-10%)**
+- Characteristics: Platform businesses, network effects, advertising-driven
+- Economic Sensitivity: Medium
+- Use: Growth, secular trends (digital transformation)
+- Overweight when: Ad market strength, content consumption growth
+
+**Consumer Discretionary (8-12%)**
+- Characteristics: Cyclical demand, premium brands, e-commerce
+- Economic Sensitivity: High
+- Use: Economic growth exposure, consumer trends
+- Overweight when: Strong consumer confidence, wage growth
+
+### Cyclical Sectors (Economic Cycle Sensitive)
+
+**Financials (10-15%)**
+- Characteristics: Interest rate sensitive, credit cycle dependent
+- Economic Sensitivity: High
+- Use: Economic expansion exposure, dividend income
+- Overweight when: Rising rates, strong economy, steepening yield curve
+
+**Industrials (8-12%)**
+- Characteristics: Capital goods, infrastructure, global trade
+- Economic Sensitivity: High
+- Use: Economic growth, infrastructure spending
+- Overweight when: Fiscal stimulus, manufacturing upturn, globalization
+
+**Materials (3-6%)**
+- Characteristics: Commodity-driven, economic cycle dependent
+- Economic Sensitivity: Very High
+- Use: Inflation hedge, economic growth
+- Overweight when: Infrastructure spending, commodity supercycles
+
+**Energy (3-8%)**
+- Characteristics: Commodity price driven, capital intensive, volatile
+- Economic Sensitivity: High
+- Use: Inflation hedge, commodity exposure
+- Overweight when: Rising oil prices, underinvestment supply cycles
+- Caution: ESG concerns, energy transition risk
+
+**Real Estate (3-6%)**
+- Characteristics: Income-focused, interest rate sensitive, inflation hedge
+- Economic Sensitivity: Medium
+- Use: Diversification, income, inflation protection
+- Overweight when: Low rates, economic expansion, inflation
+
+## Geographic Allocation
+
+### US Equities (60-75% of total equity)
+
+**Rationale:**
+- Home market bias (reduce currency risk, familiar companies)
+- Deepest, most liquid markets
+- Strong corporate governance and shareholder rights
+- Dollar-denominated returns
+
+**Allocation by Market Cap:**
+- Large Cap (>$10B): 60-70% of US equity
+- Mid Cap ($2B-$10B): 20-25%
+- Small Cap (<$2B): 10-15%
+
+### International Developed Markets (15-25% of total equity)
+
+**Regions:**
+- Europe: 8-12%
+- Japan: 3-5%
+- UK: 2-4%
+- Other (Canada, Australia): 2-4%
+
+**Rationale:**
+- Diversification (different economic cycles)
+- Currency diversification
+- Access to global industry leaders
+- Valuation opportunities
+
+**Considerations:**
+- Currency risk (hedge or leave unhedged based on view)
+- Political risk (EU regulatory environment, Brexit impact)
+- Lower growth rates vs US
+
+### Emerging Markets (5-15% of total equity)
+
+**Regions:**
+- China: 2-5%
+- India: 1-3%
+- Other Asia (Taiwan, Korea): 1-3%
+- Latin America: 0-2%
+- Other: 0-2%
+
+**Rationale:**
+- Higher growth potential
+- Demographic advantages
+- Commodity exposure
+- Diversification
+
+**Considerations:**
+- Higher volatility
+- Political and regulatory risk
+- Currency volatility
+- Liquidity concerns
+
+**Risk Management:**
+- Limit to 5-10% for moderate investors
+- Use broad ETFs rather than individual stocks
+- Monitor geopolitical developments
+
+## Rebalancing Framework
+
+### Rebalancing Triggers
+
+**1. Time-Based Rebalancing**
+- **Frequency:** Quarterly or Semi-Annually
+- **Methodology:** Review allocation every 3-6 months, rebalance if needed
+- **Pros:** Disciplined, predictable, simple
+- **Cons:** May rebalance when not necessary (costs), or miss urgent needs
+
+**2. Threshold-Based Rebalancing**
+- **Trigger:** Allocation drifts >5% from target
+- **Example:** If target is 60% stocks, rebalance when stocks reach <55% or >65%
+- **Pros:** Responsive to market moves, cost-efficient
+- **Cons:** Requires monitoring, may miss small drifts
+
+**3. Hybrid Approach (Recommended)**
+- **Method:** Check quarterly, rebalance only if drift >5%
+- **Best of both worlds:** Disciplined review, cost-conscious execution
+
+### Rebalancing Thresholds
+
+| Allocation Drift | Action | Priority |
+|-----------------|--------|----------|
+| **<3%** | Monitor, no action needed | None |
+| **3-5%** | Consider rebalancing (optional) | Low |
+| **5-10%** | Rebalance recommended | Medium |
+| **>10%** | Rebalance immediately | High |
+
+**Position-Level Thresholds:**
+- Single stock >15% of portfolio → Trim immediately
+- Single stock >20% of portfolio → Urgent trim required
+- Any position doubling target weight → Review and likely trim
+
+### Rebalancing Methods
+
+**1. Sell and Redeploy**
+- **Method:** Sell overweight positions, buy underweight positions
+- **Pros:** Precise rebalancing
+- **Cons:** Tax implications (capital gains), transaction costs
+
+**2. Direct New Contributions**
+- **Method:** Use new cash to buy underweight positions
+- **Pros:** No selling (tax-efficient), simple
+- **Cons:** Slower rebalancing, requires regular contributions
+
+**3. Dividend Reinvestment**
+- **Method:** Reinvest dividends into underweight positions
+- **Pros:** Tax-efficient, gradual rebalancing
+- **Cons:** Very slow, limited impact
+
+**4. Opportunistic (Tactical)**
+- **Method:** Sell overweight positions on strength, buy underweight on weakness
+- **Pros:** Improve execution prices
+- **Cons:** Requires active monitoring, may delay rebalancing
+
+**Recommendation:** Use method #1 (sell and redeploy) for large drifts (>10%), method #2 for small drifts (<5%), and method #4 when actively managing.
+
+### Tax Considerations
+
+**Tax-Loss Harvesting:**
+- Sell positions with losses to offset capital gains
+- Reinvest in similar (but not substantially identical) securities
+- Avoid wash sale rule (30-day rule)
+
+**Tax-Efficient Rebalancing:**
+- Prioritize rebalancing in tax-advantaged accounts (IRA, 401k)
+- In taxable accounts, hold winners >1 year for long-term capital gains rates
+- Use new contributions to rebalance rather than selling
+
+**Timing:**
+- Rebalance in December to harvest losses
+- Rebalance in January to deploy fresh capital
+- Avoid year-end if sitting on large gains (defer taxes)
+
+## Tactical Adjustments
+
+While strategic asset allocation should be stable, tactical adjustments can enhance returns:
+
+### Market Cycle Adjustments
+
+**Early Bull Market:**
+- Overweight: Cyclicals (Financials, Industrials, Materials)
+- Underweight: Defensives (Utilities, Staples)
+- Rationale: Economic acceleration favors cyclical sectors
+
+**Mid Bull Market:**
+- Overweight: Growth (Technology, Healthcare)
+- Neutral: Cyclicals and Defensives
+- Rationale: Expansion matures, focus on quality growth
+
+**Late Bull Market:**
+- Overweight: Defensives (Utilities, Staples, Healthcare)
+- Underweight: Cyclicals
+- Rationale: Prepare for slowdown, reduce beta
+
+**Bear Market:**
+- Overweight: Cash, Bonds, Defensive equities
+- Underweight: Cyclical equities
+- Rationale: Capital preservation, prepare for recovery
+
+### Valuation-Based Adjustments
+
+**When US stocks expensive (high Shiller PE >30):**
+- Reduce US equity allocation by 5-10%
+- Increase international or value stocks
+- Increase cash/bonds
+
+**When sectors extremely overvalued:**
+- Trim sector allocation by 3-5%
+- Redistribute to undervalued sectors
+- Maintain overall equity target
+
+### Interest Rate Adjustments
+
+**Rising Rate Environment:**
+- Shorten bond duration
+- Overweight: Financials, Value stocks
+- Underweight: High P/E growth, Utilities, REITs
+
+**Falling Rate Environment:**
+- Lengthen bond duration
+- Overweight: Growth stocks, Technology, REITs
+- Underweight: Financials
+
+## Common Mistakes to Avoid
+
+### 1. Market Timing
+**Mistake:** Drastically changing allocation based on market predictions
+**Impact:** Missing recoveries, buying high/selling low
+**Solution:** Stick to strategic allocation, make only minor tactical adjustments
+
+### 2. Over-Diversification
+**Mistake:** Holding 100+ positions across 50 funds
+**Impact:** Closet indexing, high fees, complexity
+**Solution:** 15-30 individual stocks OR 5-10 ETFs for most investors
+
+### 3. Under-Diversification
+**Mistake:** Heavy concentration in single stock/sector (often employer stock)
+**Impact:** Excessive risk, correlated life outcomes (job + portfolio)
+**Solution:** Limit single stock to <10%, single sector to <25%
+
+### 4. Ignoring Rebalancing
+**Mistake:** "Let winners run" indefinitely
+**Impact:** Portfolio drifts to high risk, concentration increases
+**Solution:** Disciplined rebalancing schedule, trim winners
+
+### 5. Emotional Rebalancing
+**Mistake:** Panic selling in crashes, euphoric buying in bubbles
+**Impact:** Locking in losses, buying tops
+**Solution:** Systematic rebalancing rules, ignore emotions
+
+### 6. Chasing Performance
+**Mistake:** Shifting to last year's top-performing sectors
+**Impact:** Mean reversion, buying expensive
+**Solution:** Maintain strategic allocation, resist recency bias
+
+## Allocation Review Checklist
+
+Use this checklist when reviewing portfolio allocation:
+
+**Asset Class Level:**
+- [ ] Current stock/bond/cash allocation vs target (within 5%?)
+- [ ] Risk profile still appropriate for goals/timeline?
+- [ ] Any major life changes requiring allocation shift?
+- [ ] Tax considerations for rebalancing?
+
+**Sector Level:**
+- [ ] Any sector >30% of equity allocation?
+- [ ] Defensive sectors appropriate for market cycle?
+- [ ] Growth vs value balance appropriate?
+- [ ] Sector allocations reasonable vs benchmark?
+
+**Geographic Level:**
+- [ ] US vs International allocation on target?
+- [ ] Emerging market exposure appropriate for risk tolerance?
+- [ ] Any country concentration concerns?
+- [ ] Currency exposure considerations?
+
+**Position Level:**
+- [ ] Any single stock >15% of portfolio?
+- [ ] Top 10 holdings represent what % of portfolio?
+- [ ] Any highly correlated positions creating concentration?
+- [ ] Position sizes match conviction and risk?
+
+**Performance Level:**
+- [ ] Performance vs benchmark acceptable?
+- [ ] Any positions consistently underperforming?
+- [ ] Winners becoming too large (>2x initial allocation)?
+- [ ] Losers requiring re-evaluation (broken thesis)?
+
+## Summary
+
+**Key Takeaways:**
+
+1. **Asset allocation is the primary driver of returns** - Get the big picture right
+2. **Match allocation to risk tolerance and time horizon** - Don't take more risk than you can handle
+3. **Diversify across asset classes, sectors, and geographies** - Don't put all eggs in one basket
+4. **Rebalance systematically** - Trim winners, add to losers, maintain discipline
+5. **Minimize taxes and costs** - Tax-efficient rebalancing, low-cost implementation
+6. **Stay the course** - Avoid emotional decisions, stick to the plan
+7. **Review regularly but change rarely** - Annual review, infrequent major changes
+
+**Remember:** Asset allocation should reflect your personal circumstances, not market forecasts. The best allocation is one you can stick with through market cycles.