Markets, Not Formulas, Dictate Asset Allocation

Others have a set allocation based on asset class, such as 50% U.S. stocks, 25% international stocks and 25% bonds. Or 40% large cap, 20% small cap and some mix of other alternatives like REITs or emerging markets thrown in. They've studied the historical returns and volatility of various assets and have settled on a mix they believe will provide superior long-term results.

The most extreme are those managers permanently wed to one particular area of the market. Consider companies like Burnham or John Hancock, which run actively managed mutual funds specifically focused on bank stocks. By function of their charters, they are expected to buy financials. If your interest is absolute return, it's a tough road to hoe considering virtually every one of them is off by double digits year to date.

These limitations — by allocation, level of exposure or even sector — are all self-imposed. In reality, most of us have no such limitations. We can buy or sell anything at anytime. We can hold dozens of investments or none at all.

And when it comes to managing money, I don't believe in such constraints. Given our relatively short investment time horizon, I'm not confident that any single asset class, such as large-cap stocks, will consistently be the best-performing asset. Just take a gander at shares of General Electric (GE), General Motors (GM) or Eastman Kodak (EK), all at either multiyear or multidecade lows.

In the past eight years, I've been long and short stocks and bonds, and I've owned loans, commodities and foreign exchange, all asset classes that would normally be missed by a traditional cookie-cutter allocation of large-cap stocks and bonds. Those who've held a bias for large-cap domestic stocks have missed out on every big bull market we've seen this century.

Take Japan, for example. In recent weeks I've been enthusiastic about the prospects for Japanese equities.

Yet like stocks world-wide, Japanese stocks have fallen as well, with the Nikkei 225 index dropping about 5% from its high in early June. When stocks fall in the U.S., they tend to fall almost everywhere else as well. I've pointed out for some time how owning international stocks is a poor diversification from U.S. stocks, considering how closely correlated equities have become as an asset class.

What gives me some hope is relative outperformance. While many U.S. indexes appear to be reaching or even breaking March lows, Japanese equities have been far stronger, most just a few percentage points off their highs of the year and still far above levels traded in spring. As the financial and publishing sectors in the U.S. experience multiyear declines, Japanese stocks like Hitachi (HIT) and Kyocera (KYO) are nipping multiyear highs without huge volume spikes or endless bullish chatter. (I have positions in both.)

As hard as it is to believe after last week and the market's generally negative tone, equities are actually going to go up again. And although things can and will change in the coming weeks, right now Japan is one of the strongest ideas that nobody is talking about. I don't like losing money, but I like those odds.

After the Twin Towers were destroyed there was a palpable fear that tall buildings simply wouldn't get built anymore. Nobody would insure them, let alone want to live or work in them. Thankfully, that fear has passed, with a rash of new ultra-tall skyscrapers going up, especially in my hometown of Chicago, long known for its tall buildings. I personally consider them to be big middle fingers defiantly held high toward those who seek to do America harm.

You might recall that Bill Rancic's prize for winning Season 1 of reality TV show "The Apprentice" was working on a Donald Trump real-estate project. Well, the Trump International Hotel and Tower has steadily grown into a massive and downright stunning new structure that's beginning to dominate the Chicago skyline. It'll top out at over 1,300 feet when completed next year. Although locals tend to have an unfavorable opinion of Trump, the building has received a positive reception. The Chicago Tribune hosts a real-time webcam of the construction here.

Trump's record won't stand for long. Developers of Santiago Calatrava's Chicago Spire report that 30% of the building's units have been sold, despite condo prices that start at $750,000 — for a studio. When completed in 2010, the 2,000-foot tall structure, perched elegantly on Chicago's lakefront, will be the second-tallest building in the world.

It's not just in the Midwest. In Philadelphia, a developer is laying plans for a 1,500-foot skyscraper that, if built, would be taller than the Sears Tower. The tallest building in Iran? The 656-foot Tehran Office Tower, about the size of the Gateway Arch in St. Louis — built more than four decades ago.

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Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in some of the securities mentioned.