asset allocation

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation

by Sebastien Page  · 4 Nov 2020  · 367pp  · 97,136 words

, T. Rowe Price In this tour de force, seasoned investor and researcher Sébastien Page provides sophisticated answers to many questions arising in the practice of asset allocation, risk management, forecasting, and portfolio construction. Page has a tremendous sense of what is important in investment management, and this book reflects that wisdom. —

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Banking, Harvard Business School This is a wonderful book. It represents an authoritative survey of a broad range of recent research on related topics of asset allocation, risk measurement, and return forecasting, with an emphasis on its practical application in asset management. It is thoughtful, well written, and surprisingly entertaining. The

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academia and practice, combining insights from rigorous research and high-bandwidth anecdotes, to provide an amazingly entertaining and informative tapestry of state of the art asset-allocation techniques. This book is a must-have for anyone who has ever been curious on how the very best construct investment portfolios. —Vineer Bhansali

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the United States, as of February 28, 2018, was 20.01. 8. https://www.pimco.com/en-us/insights/economic-and-market-commentary/global-markets/asset-allocation-outlook/singles-and-doubles. 9. https://www.blackrockblog.com/blackrock-capital-markets-assumptions/. 10. https://www.aqr.com/Insights/Research/Alternative-Thinking/2018-Capital-Market

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change. Each building block was expected to add value incrementally. This example fits well within the framework I advocate throughout this book: for a complete asset allocation approach, each building block—ideas, processes, investment views, inputs, models—must build on the others. Otherwise, simple is better. No need to unnecessarily complicate

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. In the monograph I coauthored with my former PIMCO colleagues Vasant Naik, Mukundan Devarajan, Andrew Nowobilski, and Niels Pedersen (2016), titled “Factor Investing and Asset Allocation: A Business Cycle Perspective,” we use a definition of carry that includes roll down, based on the difference between spot and 12-month forward swap

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factors. However, there is little published on how to use these factors to inform investment decisions. In a 2017 paper titled “Macroeconomic Dashboards for Tactical Asset Allocation,” my colleagues David Clewell, Chris Faulkner-MacDonagh, David Giroux, Charles Shriver, and I take the practitioner’s perspective. We show how to build dashboards

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design stand-alone systematic trading strategies based on macro factors. Rather, we show how investors can build macro factor dashboards to introduce discipline into their asset allocation process (in combination with other inputs, such as relative valuations). In Chapter 3, I showed that valuation signals don’t always have very high

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asset returns. Rather, we merely identify correlations that appear meaningful and leave it to the investor to assess causation. Investors shouldn’t build systematic tactical asset allocation strategies based solely on these macro data. Instead, macro factors are often used to confirm relative valuation signals. For example, if non-US equities are

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the expected return if the macro factor scenario is realized over the next year. 2. However, they lead industrial production by one year. For tactical asset allocation, this obviously would be like cheating because it would assume perfect foresight. 5 Momentum and Something About Horoscopes The frictions that prevent efficient markets are

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appears to work well across risk forecast methodologies, asset classes (stocks, bonds, currencies), factors/risk premiums, regions, and time periods. These results suggest that any asset allocation process can be improved if we incorporate volatility forecasts. But a few caveats apply. Cynics may argue that only backtests that generate interesting results get

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(simulated) alpha across markets and time periods and for several variations of the methodology. William Fallon, James Park, and Danny Yu, in their 2015 paper “Asset Allocation Implications of the Global Volatility Premium,” backtest volatility risk premium strategies across 11 equity markets, 10 commodities, 9 currencies, and 4 government bond markets. They

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in my introduction to this risk forecasting—all focus on short-term risk forecasts, mostly between one-hour and one-month horizons. For strategic asset allocation and many tactical asset allocation processes, these forecast horizons aren’t long enough. There also appears to be an unspoken assumption among the authors of these studies that

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short-term volatility persistence. A more surprising result was that shorter estimation windows also produced better forecasts at longer horizons. This result is important for asset allocation because it means we can also improve risk-adjusted returns without tactical volatility management. On average, across asset classes and bets, volatility measured over the

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private equity investments.11 Money has flowed into these asset classes partly because of their perceived diversification benefits. Consultants have used mean-variance optimization in asset allocation or asset liability studies to make a strong case for increased allocations. In the end, alternative assets are often sold as free lunches because they

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may be the only true source of diversification in multi-asset portfolios. Therefore, the stock-bond correlation is one of the most important inputs to asset allocation. In our study, we compared the empirical stock-bond conditional correlation profile with its normally distributed benchmark. Unlike results for other correlations, this profile

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portfolio construction—or, at least, that they stress-test their correlation assumptions. Scenario analysis, either historical or forward-looking, should take a bigger role in asset allocation than it does. A wide range of portfolio optimization methodologies directly address nonnormal left-tail risk and, ipso facto, the failure of diversification. The most

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for Tail-Risk-Aware Analytics 1. Don’t blindly rely on full-sample correlations for portfolio construction. 2. Give scenario analysis a meaningful role in asset allocation decisions. 3. Estimate the end investors’ risk tolerance accordingly against returns. 4. Use portfolio optimization tools that account directly for left-tail risks. 5.

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each scenario, we can apply an attribution model to produce a detailed, hypothetical attribution. Our model decomposes returns into contributions from security selection, tactical asset allocation, and strategic asset allocation. It further decomposes these returns into asset class-, factor-, and security-level contributions. The ability to zoom in and out of decision layers is

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alternative factors. There is no industry consensus on how to map asset classes to risk factors. In a monograph I mentioned earlier, “Factor Investing and Asset Allocation: A Business Cycle Perspective” (2016), my coauthors and I provide an overview of methodologies to define factors, which include statistical methods (principal components analysis,

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and momentum strategies that invest from the top down, across countries’ indexes, government bonds, and currencies, are essentially a form of systematic GTAA (global tactical asset allocation). These strategies are often referred to as “style premiums” because they differ from other risk premiums that are constructed as long-short portfolios of individual

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divided on the topic of risk parity. Some prominent asset managers seem to religiously believe that it offers better risk-adjusted performance compared with traditional asset allocation approaches, irrespective of where and how it is implemented. Others believe that risk parity is a fad fueled by misleading interpretations of finance theory and

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simplifies the compliance requirements for this book), albeit one that’s not divorced from reality. Suppose that through active security selection (via fundamental research), tactical asset allocation (as described earlier in this book), and structural portfolio design advantages (also based on many of the concepts we reviewed in this book), an actively

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performance over time. This strategy typically focuses on equity index options and comes with a targeted equity exposure (“delta hedging”). Diversified Global Portfolio This sample asset allocation (Table 17.4) is meant to represent a flagship fund of funds that can be offered to investors globally. Its opportunity set includes developed markets

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and emerging markets bond strategies, and various diversifying strategies designed to improve risk-adjusted returns. It’s the quintessential one-stop-shop solution. The strategic asset allocation is 60% stocks (without home bias), 28% global fixed income, including exposure to below-investment-grade securities, and 12% alternative investments. Alternative investments may

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income, absolute return, liability-driven, retirement, etc. The key to a successful solutions business is to start with client needs. Also, we have built customized asset allocation models for intermediaries. These models are quite popular with advisors and their clients. Increasingly, advisors spend more time on financial planning and tax management questions

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can be useful, but they offer relatively limited predictability (again, except for relative yields across fixed income asset classes, which work well). In a tactical asset allocation context, we have discussed how valuation, fundamental, and macro factors can be combined through a discretionary framework, in which experienced investors play a key role

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titled Corporate Governance and Value Creation, available at https://www.amazon.com/Corporate-Governance-Value-Creation-Jean-Paul/dp/0943205719. Afterword Theoretical Foundations of the Asset Allocation Decision WHEN I RETIRED AFTER 40 YEARS OF TEACHING FINANCE, I left the field entirely. A clean break. I hopped on the snowmobile and started

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Finance is a science, just like physics or chemistry: it relies on solid theoretical foundations, involves rigorous empirical analysis, and leads to important practical applications. Asset allocation, as presented in this book, provides a credible example of the science and practice of finance as applied to capital markets decisions. The goal is

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Long-Run Stock Market Outlook,” Journal of Portfolio Management, vol. 24, no. 2, pp. 11–26. Campbell, John Y., and Luis M. Viceira. 2002. Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. New York: Oxford University Press. Campbell, Rachel, Kees Koedijk, and Paul Kofman. 2002. “Increased Correlation in Bear Markets,” Financial

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Society, vol. 41, no. 1, pp. 135–155. Clewell, David, Chris Faulkner-MacDonagh, David Giroux, Sébastien Page, and Charles Shriver. 2017. “Macroeconomic Dashboards for Tactical Asset Allocation,” Journal of Portfolio Management, vol. 44, no. 2, pp. 50–61. Cocoma, Paula, Megan Czasonis, Mark Kritzman, and David Turkington. 2017. “Facts About Factors,” Journal

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Traded Funds and Asset Return Correlations,” European Financial Management. Retrieved from wileyonlinelibrary.com/journal/eufm. Dahlquist, Magnus, and Campbell R. Harvey. Spring 2001. “Global Tactical Asset Allocation,” Journal of Global Capital Markets. Dalio, Ray. 2017. Principles: Life and Work. New York: Simon & Schuster. De Bondt, Werner F. M., and Richard Thaler.

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Smoothing,” Alpha Architect. Retrieved from alphaarchitect.com/2016/03/07/replicating-private-equity-the-impact-of-return-smoothing/. Franz, Richard. December 2013. “Macro-Based Parametric Asset Allocation.” Retrieved from https://ssrn.com/abstract=2260179. Franzoni, Francesco, Eric Nowak, and Ludovic Phalippou. 2012. “Private Equity Performance and Liquidity Risk,” Journal of Finance,

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Return Predictability,” The Journal of Portfolio Management, vol. 43, no. 3, pp. 60–76. Idzorek, Thomas M., and Maciej Kowara. 2013. “Factor-Based Asset Allocation Vs. Asset-Class-Based Asset Allocation,” Financial Analysts Journal, vol. 69, no. 3, pp. 19–29. Ilmanen, Antti. 2011. Expected Returns: An Investor’s Guide to Harvesting Market Rewards

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Investment Strategies, vol. 4, no. 1, pp. 3–18. Jondeau, Eric, and Michael Rockinger. 2012. “On the Importance of Time Variability in Higher Moments for Asset Allocation,” Journal of Financial Econometrics, vol. 10, no. 1, pp. 84–123. Jorion, Philippe. 1986. “Bayes-Stein Estimation for Portfolio Analysis,” Journal of Financial and Quantitative

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no. 4, pp. 768–783. DOI: 10.2307/1910098. Naik, Vasant, Mukundan Devarajan, Andrew Nowobilski, Sébastien Page, and Niels Pedersen. December 2016. “Factor Investing and Asset Allocation: A Business Cycle Perspective” (monograph), CFA Institute Research Foundation Publications, vol. 2016, no. 4. Novy-Marx, Robert, and Mihail Velikov. 2018. “Betting Against Betting Against

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recommendations for, 134 scenario analysis in, 134 stocks vs. bonds in, 185–195 strategic (see Strategic asset allocations) tactical (see Tactical asset allocation [TAA]) theoretical foundations of, 271–274 (See also Portfolio construction) “Asset Allocation” (Pedersen, Page, and He), 129 “Asset Allocation Implications of the Global Volatility Premium” (Fallon, Park, and Yu), 103 Asset classes, 173–184 asset

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(see Scenario analysis) Style premiums, 179 Sullivan, Rodney N., 235 Sustainable growth rate, 30, 37 Swensen, David, 129 Swinkels, Laurens, 18 T. Rowe Price, 191 Asset Allocation Committee, xii capital markets assumptions approach at, 37–38 and global equity markets forecasts, 13–14 portfolios/products managed by, 248 scenario analysis at, 157

The New Science of Asset Allocation: Risk Management in a Multi-Asset World

by Thomas Schneeweis, Garry B. Crowder and Hossein Kazemi  · 8 Mar 2010  · 317pp  · 106,130 words

48 50 54 56 v vi CONTENTS CHAPTER 4 Asset Classes: What They Are and Where to Put Them Overview and Limitations of the Existing Asset Allocation Process Asset Allocation in Traditional and Alternative Investments: A Road Map Historical Return and Risk Attributes and Strategy Allocation Traditional Stock/Bond Allocation versus Multi

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Extreme Market Sensitivity Market Segment or Market Sensitivity: Does It Matter? How New Is New? Notes CHAPTER 5 Strategic, Tactical, and Dynamic Asset Allocation Asset Allocation Optimization Models Strategic Asset Allocation Tactical Asset Allocation Dynamic Asset Allocation Notes CHAPTER 6 Core and Satellite Investment: Market/Manager Based Alternatives Determining the Appropriate Benchmarks and Groupings Sample Allocations Core Allocation Satellite Investment

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Theory Is Too Simplistic to Deal with Private Equity, Real Estate, and Hedge Funds Notes CHAPTER 11 The Importance of Discretion in Asset Allocation Decisions The Why and Wherefore of Asset Allocation Models Value of Manager Discretion 215 215 216 216 217 217 218 218 218 219 220 221 222 222 223 223 223

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any investor’s library. This chapter provides a brief history of how major advances in financial theory and investment practice affected investors’ approach to asset allocation and how asset allocation has had to evolve to meet changes in economic, regulatory, and technological environments. However, given the range of current and past efforts to diagnose

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reasonable summary of how we got here, much less what “here” is. Before reviewing how we have arrived at current approaches to asset allocation, a brief review of what asset allocation is seems appropriate. Simply put, the ability to estimate what the future returns and risks of a range of investors’ acceptable investments are

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and to choose a course of action based upon those alternatives is at the heart of asset allocation. As a result, much of asset allocation is centered on the quantitative tools or approaches used to estimate the probabilities of what may happen (risk) and the alternative approaches

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the most part, this book does not attempt to depict the results of the most current research on 3 A Brief History of Asset Allocation various approaches to asset allocation. In many cases, that research has not undergone a full review or critical analysis and is often based solely on algorithmic based model building

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, Structured Products APT, Portfolio Insurance CAPM and EMH 1950s EXHIBIT 1.1 1960s 1970s 1980s 1990s 2000s Timeline of Financial Advances in Asset Allocation 2010s 4 THE NEW SCIENCE OF ASSET ALLOCATION Markowitz formalized the return and risk relationship between securities in what is known today as the mathematics of diversification. If expected single

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the brightest; there is just too much money to make or lose.12 14 THE NEW SCIENCE OF ASSET ALLOCATION ASSET ALLOCATION IN THE MODERN WORLD Looking back over the past decade, the issues in asset allocation had less to do with the theoretical models underlying return determination than the changes in market and trading structures

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solution to the risk management problem. While we attempt to summarize some of the issues in many of the traditional model approaches to asset allocation, the size of the asset allocation problem overwhelms any individual approach if for the simple reason that there are too many individuals, each with their own unique set of

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Risk 37 public (individual versus institutional, private versus public), it is impossible to come up with a single one-size-fits-all asset allocation model. ■ The problem remains that if asset allocation is the primary means by which investors attempt to reach the highest expected return at the lowest level of risk, then investors

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are simply exposed to too much risk from many of the more simplified methods of asset allocation. Most current asset allocation models use long-term return, historical volatility, and correlation when attempting to evaluate potential return and risk alternatives. The shortcomings of such models are

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Stocks Private Equity Hedge Funds Bonds Real Estate Managed Futures Commodities EXHIBIT 4.3 Traditional and Alternative Asset Class Breakdown 66 THE NEW SCIENCE OF ASSET ALLOCATION Primary Asset Classes ■ Traditional Assets ■ Equity Domestic Investment International Non Domestic Emerging Markets ■ Fixed Income Government Corporate Corporate High-Yield ■ Traditional Alternative Investments ■ Private Equity

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sub-asset groupings may be regarded as better diversifiers or return enhancers depending upon the comparison portfolio. 70 THE NEW SCIENCE OF ASSET ALLOCATION TRADITIONAL STOCK/BOND ALLOCATION VERSUS MULTI - ASSET ALLOCATION This section provides an analysis of a set of risk (standard deviation) ranked portfolios (aggressive and conservative) within each of three sets

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assets are easily accessible through investable indices, most alternative assets are accessed through selecting active managers, which poses unique issues in asset allocation. Given the wide range of issues involved in asset allocation, a systematic approach to its use across traditional and alternative asset classes is important for client education, client marketing, and product

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because of the clients’ background with the methodology. As a consequence, the analysis within this chapter starts with the use of asset allocation optimization models in portfolio creation and management. ASSET ALLOCATION OPTIMIZATION MODELS Traditional portfolio optimization attempts to find the portfolio with the lowest possible risk (measured by the variance of the return

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cash flows and the time horizon is somewhat unpredictable as well. Therefore, the insurance fund must maintain significant liquidity. Strategic, Tactical, and Dynamic Asset Allocation 99 STRATEGIC ASSET ALLOCATION Strategic asset allocation is a major determinant of variability of a portfolio and, to a lesser degree, its total return. Studies have shown that up to 90

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the investor’s financial position or the economic environment, the strategic allocation has to be reevaluated. Strategic, Tactical, and Dynamic Asset Allocation 101 TACTICAL ASSET ALLOCATION Tactical asset allocation (TAA) is a dynamic approach to asset allocation where the asset mix is actively adjusted in response to short-term changes in the economic environment. The objective is to

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$1,000 from December 1996 through June 2009 2800 2600 2400 2200 2000 1800 1600 1400 1200 1000 Strategic, Tactical, and Dynamic Asset Allocation 107 DYNAMIC ASSET ALLOCATION In general, dynamic asset allocation programs are targeted at creating a risk-return profile over time that generally assures a minimum return while preserving the opportunity for potential

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various assumptions regarding the behavior of interest rates, underlying assets of the diversified portfolios, fee structures, coupon rates and so on. Strategic, Tactical, and Dynamic Asset Allocation 109 WHAT EVERY INVESTOR SHOULD REMEMBER ■ Markowitz based optimization provides suggested strategy weightings that are sensitive to a wide range of issues related to parameter

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estimation. For example, asset allocations are sensitive to the differential return forecasts (anticipated weightings may therefore be better determined using forecasted returns) and the measurement interval used in calculating the

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inputs to the various asset allocation procedures. ■ Tactical asset allocations benefit from the consideration of alternative core strategy portfolios that differ in the underlying factors used in determining the tactical rebalancing. Dynamic

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the underlying sources of risk and returns of a given investment or its associated “grouping” is essential to a meaningful 112 THE NEW SCIENCE OF ASSET ALLOCATION asset allocation program. In many programs, non-investable benchmarks have been used to provide a basis for determining the potential risks and returns of asset classes from

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capture the expected return and risk attributes of the strategic portfolio may be passive 113 Core and Satellite Investment: Market/Manager Based Alternatives Overview: Strategic Asset Allocation Methodology Universe of All Available Investments Public Indices and Databases Client Supplied or Custom Target Performed Quarterly Liquidity, Track Record, and Other Filters Relationships Among

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Investments (Private Equity, Long-Term Lock Up) Satellite I: Investable Alternatives to Core Investables (Mutual Funds, Manager Based Alternatives) Core Investables (ETFs, Replication Products) Strategic Asset Allocation Benchmark Determined EXHIBIT 6.2 Strategic Benchmark, Core, and Satellite Groupings In Exhibit 6.3, the core investment classes have been broken down into equity

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excess return relative to the core benchmark product but will retain a relatively high correlation with that 116 EXHIBIT 6.4 THE NEW SCIENCE OF ASSET ALLOCATION Alternative Product Characteristics in Core through Satellite Products Investment Sector Core Satellite I Satellite II Product Characteristics Fees Liquidity Transparency Required Minimums Diversified Exposure Regulatory

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reflect the return and risk characteristics of various noninvestable asset class benchmarks. Exhibit 6.5 reports the correlations between the noninvestable benchmarks used in portfolio asset allocation determination and the underlying core investments based on investable ETFs, as well as replication indices that track the underlying noninvestable index (the primary period of

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alternative investments as the minimum investment level is systematically increased and investor wealth or investment levels increase. (Of course, if 118 THE NEW SCIENCE OF ASSET ALLOCATION EXHIBIT 6.5 Comparison Correlations for Benchmark, Core, and Satellite Groupings Benchmark Core Correlations to Benchmark Satellite 1 Investments Correlations to Benchmark Satellite 1 Investments

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return characteristics of the private equity index, traditional U.S. equity and bond indices, and other alternative 152 EXHIBIT 7.14 THE NEW SCIENCE OF ASSET ALLOCATION Private Equity and Comparison Benchmark Performance (2001–2008) Stock, Bond, and Commodity Performance Annualized Total Return Annualized Standard Deviation Information Ratio Maximum Drawdown Correlation with

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bond markets over a wide range of economic periods. While the availability of this data provided the groundwork for testing the potential benefits of various asset allocation processes, asset allocators failed to emphasize some of the problems in the use of these generic stock or bond benchmarks. Over the years, improved data and research

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of commonly used alternative investment benchmarks. Where applicable we also provide performance comparisons between investable and noninvestable indices. PRIVATE EQUITY In research conducted on the asset allocation benefits of private equity, academics and practitioners have focused on a range of historical data series purporting to reflect the performance of various private equity

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favorable period. 4. As discussed in Chapter 10, Madoff’s investment strategy was primarily a long collar strategy. 212 THE NEW SCIENCE OF ASSET ALLOCATION CHAPTER 10 Myths of Asset Allocation rom time to time, we have to challenge our strongly held beliefs. This is a difficult endeavor because it may very well be

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lose money in the same market environment. The truth and one that is not commonly associated with the marketing of asset allocation is that asset allocation should not be viewed primarily F 212 Myths of Asset Allocation 213 as a method that ensures that positive returns can be obtained in any market environment. Investors must fundamentally

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. In short, as markets change, so do myths; some just change more slowly than others. Having dealt with the core myth of asset allocation, that is, the myth that asset allocation provides positive returns in almost any market environment, the remainder of this chapter follows some of the additional myths that have become working

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the days when they were viewed as magicians or wizards. Finally, the truth—and one that is not commonly associated with the marketing of asset allocation—is that asset allocation should not be viewed primarily as a method that ensures that positive returns can be obtained in any market environment. Investors must fundamentally understand

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balanced with the additional benefits of passive security based indices, including greater transparency, capacity, and liquidity. 226 THE NEW SCIENCE OF ASSET ALLOCATION CHAPTER 11 The Importance of Discretion in Asset Allocation Decisions sset allocation is a discipline of judgments and decisions. This requires discretion, in the models we choose and in the decisions

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, this question is a straw man. The critical path for each group is not whether discretion should be an integral dimension of the asset allocation process. Each understands that asset allocation without discretion is rather like the fruit of the medlar tree—rotten before it is ripe. The seminal issue is how to create

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return and risk profile only through the use of options or their synthetic alternatives. As a result, discretion in the asset allocation process should exist. Discretion in asset allocation is an additional factor in the asset allocation process. For much of this book, we have centered our discussions on the concept of risk management (e.g

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dispersion on the potential benefits of trading and in this context supported the potential benefits of security selection versus asset allocation. 3. See Fung and Hsieh (2006). 240 THE NEW SCIENCE OF ASSET ALLOCATION CHAPTER 12 Asset Allocation: Where Is It Headed? s a matter of full disclosure, the authors have managed clients’ monies over the

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, H. Commodities and Commodity Derivatives. Hoboken, NJ: John Wiley & Sons, 2005. Graham, J., and C. Harvey. “Market Timing Ability and Volatility Implied in Investment Newsletters’ Asset Allocation Recommendations.” Journal of Financial Economics 42, Issue 3 (November 1996): 397–421. Bibliography 281 Grubel, Herbert. “Internationally Diversified Portfolio: Welfare Gains and Capital Flows.” The

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risk and return advantages.” —E. Craig Asche, President and CEO, Chartered Alternative Investment Analyst Association “This publication is a veritable reference in the area of asset allocation and risk management. Clear, accurate, and illustrated with relevant practical examples, it will allow practitioners to benefit from an effective detailed summary produced by recognized

Portfolio Design: A Modern Approach to Asset Allocation

by R. Marston  · 29 Mar 2011  · 363pp  · 28,546 words

products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Marston, Richard C. Portfolio design : a modern approach to asset allocation / Richard C. Marston. p. cm. – (Wiley finance ; 641) Includes index. ISBN 978-0-470-93123-3 (hardback); ISBN 978-111-8-00705-1 (ebk);

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11, 2011 22:6 Printer: Courier Westford Contents Preface xiii Acknowledgments xv About the Author xvii About the Book xix Disclaimers xxi CHAPTER 1 Asset Allocation Ingredients of Asset Allocation Lessons of the Recent Downturn So Are Bonds the Place to Invest? So What Happens When the Economy Turns Up? Some Necessary Tools for

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: TIX/b FM P2: c/d QC: e/f JWBT412-Marston T1: g January 11, 2011 22:6 Printer: Courier Westford Contents CHAPTER 8 Strategic Asset Allocation Expanding the Portfolio to Include Other Bonds and Stocks Expanding the Portfolio to Include Foreign Stocks The Dirty Secret of Optimization Alternative Approaches to Optimization

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CONTENTS Performance in a Portfolio Does Gold Belong in the Portfolio? Active Investment in Commodities—Managed Futures Summary—Key Features of Commodity Investments CHAPTER 13 Asset Allocation with Alternative Investments Diversifying into Real Estate—Alternatives for Ordinary Investors Expanding the Menu of Alternative Assets High Net Worth (HNW) Portfolios Ultra HNW Portfolios

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a particular investor—is the key to successful investing. Choosing managers for individual asset classes is certainly important, but it’s care in designing the asset allocation that can make or break a portfolio. Such care cannot protect an investor from losses in an economic downturn, but it can cushion the blow

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can design portfolios that reflect all of the advances in investment theory and practice over the last 40 years. Twenty years ago, I began teaching asset allocation in a program at the Wharton School established to train financial advisors in modern portfolio management. The program was established jointly by Wharton and the

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from MIT. Marston has written or co-edited four previous books on finance, including his award-winning International Financial Integration (Cambridge, 1995). Marston has taught asset allocation in the CIMA investment management certificate program at Wharton since the program was founded in 1988. He has also given investment presentations throughout this country

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, 2011 10:37 xxiv Printer: Courier Westford P1: OTA/XYZ P2: ABC c01 JWBT412-Marston December 20, 2010 16:58 Printer: Courier Westford CHAPTER 1 Asset Allocation An Introduction sset allocation has different aims depending on the investor. A younger investor may want to build wealth over time, taking risks that would

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assess how well they will perform in the future. P1: OTA/XYZ P2: ABC c01 JWBT412-Marston December 20, 2010 16:58 Asset Allocation Printer: Courier Westford 3 INGREDIENTS OF ASSET ALLOCATION Investing has evolved over the last few decades. First, there is the shift away from individual stock selection toward diversification of stock

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estate investments. But the chapter will also try to determine whether a home is a good investment. P1: OTA/XYZ P2: ABC c01 JWBT412-Marston Asset Allocation December 20, 2010 16:58 Printer: Courier Westford 5 The last 10 years have seen a tremendous commodities boom. So naturally, investors have discovered this

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and the world discovers that it is “running out of resources”. Chapter 12 will study the resulting returns. How much difference do alternatives make to asset allocation? Chapter 13 examines two approaches to alternatives. In one approach, investors confine their alternatives to real estate alone. This is the approach recommended by David

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to the mix. Chapter 13 tries to assess the gains from adding alternatives to the portfolio. And it tries to determine the relative influence of asset allocation and manager performance in those gains. The book continues with two chapters on spending. After all, investing has an important long-run aim, to

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in a period of financial crisis. That would require moving away from P1: OTA/XYZ P2: ABC c01 JWBT412-Marston December 20, 2010 16:58 Asset Allocation Printer: Courier Westford 15 equity-oriented investments that have served institutions with long time horizons well.”11 Actually, investors have to do more than sit

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be used repeatedly in the book to show how well one portfolio is doing relative to another. P1: OTA/XYZ P2: ABC c01 JWBT412-Marston Asset Allocation December 20, 2010 16:58 Printer: Courier Westford 19 NOTES 1. Markowitz (1952) introduced the efficient frontier, the combination of portfolio returns and risks

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they did in earlier sample periods. We need alternative investments to improve portfolio performance. Before studying alternative investments, we will consider two further topics in asset allocation. The first one concerns the optimization process itself. Does optimization result in sensible looking portfolios? We will investigate this question by looking at U.S

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by David Svensen of the Yale Endowment. P1: a/b c08 P2: c/d QC: e/f JWBT412-Marston T1: g December 8, 2010 Strategic Asset Allocation 17:51 Printer: Courier Westford 165 16. The Zephyr AllocationADVISOR software was used to calculate the standard deviations and correlations. Portfolio A invests in TIPS

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Westford P1: a/b c13 P2: c/d QC: e/f JWBT412-Marston T1: g December 10, 2010 15:51 Printer: Courier Westford CHAPTER 13 Asset Allocation with Alternative Investments lternative investments have captured the fancy of investors, both individuals and institutions. Many of these investors have become convinced that the bull

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the period since 1985 when David Swensen took over its direction. The analysis of the Yale endowment will be designed to disentangle the effects of asset allocation from the superior access to managers provided by the Yale Endowment. The final section examines how alternative investments performed in the financial crisis. A 257

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3000 all-cap U.S. stock index, the MSCI EAFE index, and the Barclays Capital Aggregate bond index. As explained in Chapter 8 on strategic asset allocation, this three-asset portfolio provides diversification across the entire U.S. stock market, international diversification, and diversification across different types of U.S. investment grade

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ought to be considered seriously. To evaluate the Swensen portfolio, we again employ the premium method for estimating returns. As explained in Chapter 8 on asset allocation, the premium method builds on the fundamental capital market assets, U.S. Treasury bonds and the S&P 500. Those returns were estimated to be

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for equities P1: a/b c13 P2: c/d QC: e/f JWBT412-Marston T1: g December 10, 2010 15:51 Printer: Courier Westford 261 Asset Allocation with Alternative Investments TABLE 13.1 Comparison between Swensen’s Unconventional Success Portfolio and Conventional Portfolio Unconventional Success Portfolios Portfolio Shares U.S. Treasury Bonds

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Sources: 2009, The Yale Endowment. success. Whether other investors should emulate Yale is a question that will be addressed in this section. Consider the strategic asset allocation reported in the 2009 Yale Endowment report as illustrated in Figure 13.5. Only 22 percent of the portfolio is in traditional stock and bond

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asset classes. P1: a/b c13 P2: c/d QC: e/f T1: g JWBT412-Marston December 10, 2010 15:51 Printer: Courier Westford 271 Asset Allocation with Alternative Investments With such a large allocation to alternative investments, the Yale endowment has lowered risk to much lower levels than would normally be

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as reported by NACUBO, the National Association of College and University Business Officers. Each year NACUBO conducts a survey of its members to determine the asset allocations that their endowments are following. NACUBO reports two sets of figures, those that equally weight all colleges and universities and a dollar-weighted average. The

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massive size of the endowments of the richest institutions ensures that the dollar-weighted average is heavily influenced by the asset allocation decisions of the biggest endowments. In 2008, the top 10 institutions had 36 percent of the endowment monies of the 791 institutions in the survey

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by all institutional investors? Some evidence about this issue is provided by the 2009 Greenwich Associate survey of pension plans, endowments, and foundations. The average asset allocation of the institutions in this survey is given in Figure 13.7.16 These institutions devoted only 14.8 percent of their portfolios to alternative

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alternative asset classes such as hedge funds, venture capital, and private equity. So the returns on what we call the indexed portfolio will reflect the asset allocation chosen by Yale together with the performance of the average fund managers in the alternative investment indexes. And recall that c13 P2: c/d QC

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bond portfolio is made up primarily of Treasuries) P1: a/b c13 P2: c/d QC: e/f JWBT412-Marston T1: g December 10, 2010 Asset Allocation with Alternative Investments 15:51 Printer: Courier Westford 275 Domestic equity: Russell 3000 all-cap stock index Foreign equity: MSCI EAFE and MSCI Emerging Market

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Alpha∗ 4.2% P1: a/b c13 P2: c/d QC: e/f JWBT412-Marston T1: g December 10, 2010 15:51 Printer: Courier Westford Asset Allocation with Alternative Investments 277 LESSONS ABOUT ALTERNATIVE INVESTMENTS LEARNED IN THE FINANCIAL CRISIS Yale and other institutional investors suffered along with the rest of us

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would be nice if we could always have the benefit of diversification, but life doesn’t work that way. VERDICT ON ALTERNATIVE INVESTMENTS No doubt asset allocation is improved with the addition of alternative investments. The adoption of alternatives will not guarantee Yale-size returns because other investors do not have the

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without alternatives. Investors can improve their risk-adjusted P1: a/b c13 P2: c/d QC: e/f JWBT412-Marston T1: g December 10, 2010 Asset Allocation with Alternative Investments 15:51 Printer: Courier Westford 281 performance with alternatives. They can reduce risk for a given return or increase return for a

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undermine these investment and spending plans? This chapter will attempt to answer these three questions. The spending policy of a foundation is related to its asset allocation. After all, a foundation that prefers to invest in very safe assets must realize that its spending policy has to be equally conservative. And a

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least over the range of asset returns and spending rules being considered). In fact, it makes sense for the foundation’s board to make the asset allocation decision in conjunction with its decision regarding spending policy. The two are intertwined. It’s important to recognize how the concept of risk changes when

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a foundation considers asset allocation along with its spending rule. Many investors focus on the downside risk of next year’s returns. Stocks are undoubtedly more risky than bonds when

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, the twenty-fifth percentile of the distribution has the portfolio rising from $10 million to $21.1 million rather than to $17.0 million. What asset allocation is typically chosen by foundations and other taxexempt institutions? The latest Greenwich Associates survey of more than 2000 pension plans, endowments, and foundations reports that

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f JWBT412-Marston T1: g December 20, 2010 17:6 Printer: Courier Westford CHAPTER 15 Investing and Spending in Retirement fter a foundation chooses its asset allocation, it should be able to leave that allocation unchanged for the indefinite future. As the last chapter showed, a foundation can set up a spending

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changes to its allocation. It will hire and fire managers, but the overall investment plan should remain unchanged. Some foundations, of course, will pursue tactical asset allocation in an attempt to take advantage of shortterm opportunities to overweight or underweight specific asset classes. But usually the tactical asset shifts are relative to

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a strategic (i.e., long-run) asset allocation that remains unchanged. Individual investors are different. Most individual investors have one major investment goal—to save enough for retirement. Spending out of their portfolio

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have an investment philosophy built around entry and exit from the market. A much larger group of investors are willing to adopt a long-run asset allocation strategy as long as markets behave themselves. But when the stock market swoons, as it periodically does, these investors will abandon that strategy. And

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Printer: Courier Westford 320 PORTFOLIO DESIGN REBALANCING DEFINED Rebalancing is the term used to describe the periodic adjustment of a portfolio to restore a strategic asset allocation. Rebalancing sounds so sensible in theory. You rebalance in order to keep investments in line with your original allocation. In practice it is very difficult

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. Standard and Poor’s, 2008, S&P Global Stock Markets Factbook. Standard and Poor’s, 2009, S&P Global Stock Markets Factbook. Swankoski, Mark, 2005, “Asset Allocation: REITS—An Additional Source of Portfolio Diversification,” Smith Barney Consulting Group Research Publication (June). Swensen, David F., 2005, Unconventional Success: A Fundamental Approach to Personal

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, 291 accredited investors, 168 ADR. See American Depository Receipts alpha, 4, 16–17 alpha∗ , 16 alternative estimates, stock returns, 32–35 alternative investments, 5, 191 asset allocation, 257 financial crisis and, 277–280 portfolios, 262–264 Yale University Endowment, 269–276 Altman, Edward L., 129 American Depository Receipts (ADR), 90–92 American

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Stock Exchange (AMEX), 43 AMEX. See American Stock Exchange analysis, 15–16 Argentina, 103 Argentine crisis, 112 arithmetic average, 15–17, 46 Asian crisis, 111 asset allocation, 1, 3–6, 319, 257 effects on spending rules, 296–299 history of, 143–145 international stocks, 147–150 optimization, 150–153 asymmetrical investment fees

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international bonds, 134, 142 markets, 134 sales restrictions, 135 international diversification, 93, 148–149 International Finance Corporation (IFC), 97 international investing, 73–74 international stocks, asset allocation, 147–150 investment fees, 167, 192 investment risk, emerging markets, 107–113 investment strategies, hedge funds, 169–172 IRR. See internal rate of return Israel

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–32, 107 private equity, 191 key features, 211 proportional rule, 291 purchasing power parity (PPP), 100 Q qualified purchasers, 168 R real estate, 213–214 asset allocation, 258–262 direct ownership, 220–223 diversification gains, 219 portfolio constraint, 259–260 real estate capital, 214 real estate investment trusts (REIT), 4, 214–220

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio

by Victor A. Canto  · 2 Jan 2005  · 337pp  · 89,075 words

is Chris McEvoy. His dedication, initiative, and many editorial suggestions greatly enhanced the manuscript. Andy Wiese and Samir Ghia were outstanding research assistants. xvi UNDERSTANDING ASSET ALLOCATION ABOUT THE AUTHOR Dr. Victor Canto is La Jolla Economic’s (LJE) founder and chairman, an economic consulting firm located in La Jolla, California.

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asset-class return probabilities need to be formulated. Second, those probabilities need to be applied to an investor’s long-term goals, producing a recommended asset allocation. Third, this allocation needs to be run through a quantitative framework that overweights the opportunistic sectors and underweights the overvalued ones. All this ensures there

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possible permutations and combinations of past returns for every available asset class. In the financial world, these simulations often take the form of 4 UNDERSTANDING ASSET ALLOCATION Monte Carlo simulations, computer calculations that take into account chance and randomness (hence the casino quality of the name). This can sound very sophisticated

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growth) is another issue that immediately comes to mind. A third issue is whether there are any benefits to a cyclical or tactical asset-allocation strategy. By cyclical asset allocation, we mean a strategy allowed to deviate from the long-run allocation to take advantage of predictable fluctuations in the market as opposed to

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return. One conclusion is this: The only possible contribution international stocks can make to a portfolio is as risk-reducing or diversification mechanisms. 20 UNDERSTANDING ASSET ALLOCATION Based on the statistics presented in Table 2.2, the CAPM investment implications are fairly straightforward: Avoid growth stocks in your portfolio, include some international

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resounding no. It thus appears that during the sample period, the optimal strategic location allocation was to go 100 percent with domestic stocks. 24 UNDERSTANDING ASSET ALLOCATION Table 2.5 Sample period risk-adjusted average annual returns, standard deviation, and Sharpe ratio for selected location portfolios. International Allocation 1975–2004 100%

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the economic environment and suggests growth stocks—when the environment warrants—can have an important impact on the total return of a style-based asset-allocation strategy. 30 UNDERSTANDING ASSET ALLOCATION Size Cycles Size cycles also matter. Following the methodology outlined in the previous section, I calculated 11 size-related portfolios for each of

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, it could include some temporary deviations from the long-run trends. This could be dangerous, as the sampleselection bias could result in a strategic asset allocation mistakenly overweighing or underweighing some asset classes. Because the mean-reversion hypothesis—as most people articulate it—assumes random disturbances around the mean (assuming no

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, I believe the value/growth relative performance is influenced by interactions between the tax code, the government regulations, and the inflation rate. 56 UNDERSTANDING ASSET ALLOCATION Parenthetically, despite the relative performance of value and growth stocks for the last 30 years, William Sharpe’s seminal article on style investment was not

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of diversification. A lack of synchronization between the domestic and foreign markets offers a potential upside to an active global strategy. 58 UNDERSTANDING ASSET ALLOCATION The Case for a Cyclical Asset-Allocation Strategy In brief, those are your cycles. Now, let’s draw a few early conclusions. From 1995 to 1999, large-cap stocks

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This outline, combined with the forecast of the economic indicators, suggests the portfolio tilts needed to take advantage of the foreseen economic environment. 64 UNDERSTANDING ASSET ALLOCATION Economic Drivers Asset Choices Rising Inflation Rate Real Interest Rates Inflation, Taxes, and Regulation Inflation Induced Tax Bracket Creep Foreign Exchange Value of the Dollar

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help explain shifts in corporate behavior and structure. Identifying and understanding these shifts at the source is critical to developing a cycle-based asset-allocation strategy, which is an asset-allocation strategy that is allowed to deviate from the long-run allocation to take advantage of predictable fluctuations in the market. Are Enron, WorldCom

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world. In the simpler textbooks, the interaction of rising inflation and GDP growth is commonly associated with the Phillips curve, where increases in 98 UNDERSTANDING ASSET ALLOCATION spending—generated by aggregate demand shifts—lead to higher output and higher prices. Declining inflation and real GDP growth periods represent the mirror image,

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range of geopolitical events is also useful in identifying and anticipating some secular and cyclical changes in relative performance both domestically and internationally. 132 UNDERSTANDING ASSET ALLOCATION Table 7.5 Investment advisory committee quarterly questionnaire. Economic Drivers Inflation Rate Rising Stable Falling Real Interest Rates Rising Stable Falling Taxes and Regulation Rising

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pretty much on target: The index allocation outperformed the benchmark by 97 basis points during the quarter. 140 UNDERSTANDING ASSET ALLOCATION Table 7.7 Annual return of the market weight strategic asset allocation and the cyclical asset-allocation strategies. SAA Benchmark CAA Index Return 1998 16.8% 32.3% 1999 17.1% 19.2% 2000 –

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not match an investor’s outlook, revisions are in order: Either the outlook or the probability estimate must change. 142 UNDERSTANDING ASSET ALLOCATION 8 THE CYCLICAL ASSET ALLOCATION STRATEGY’S VERSATILITY 143 any asset-allocation approaches drive home the point that there should never be any unintended bets made in a portfolio. This is correct. But

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advisors argue— given the same expected returns combination—the different market variables’ variance–covariance matrix produce the same allocation each and every time. The cyclical asset allocation (CAA) approach differentiates itself in important ways. The probabilities for CAA are derived from (and related to) the overall economic environment and the investor’

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the 2005 portfolio, the regional fixed-income portion was allocated in inverse proportion to the firm’s assessment of regional central banks sticking 150 UNDERSTANDING ASSET ALLOCATION to inflation targets. Europe led the way in this respect, with a 77 percent fixedincome allocation in the conservative portfolio. This allocation was virtually

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adjust over time so portfolios remain appropriate for investment horizons. Figure 8.2 shows a graphical representation of the lifecycle allocation. 152 UNDERSTANDING ASSET ALLOCATION Chapter 8 The Cyclical Asset Allocation Strategy’s Versatility International 2040 2030 2020 2010 Capital Preservation International 20% 17% 14% 10% 8% 6% 20% 20.4% 13.6%

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while mid- and smallcap stocks were favored within the size allocation. The sole domestic underweighting was for large-cap growth stocks. 158 UNDERSTANDING ASSET ALLOCATION Region Chapter 8 The Cyclical Asset Allocation Strategy’s Versatility International Benchmark Weight AA Weight Difference Normalized Difference 50% 30% 33.0% 3.0% 34.9% 10.5% 12

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arguing the small-cap effect is nothing more than the result of inflation hedging, tax avoidance, and regulatory skirting. When taxes, inflation, and 168 UNDERSTANDING ASSET ALLOCATION regulations increase, small-cap companies tend to outperform because they can adjust more quickly to changing economic conditions than less-flexible large-cap companies. Thus

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for the world economy in the sense that they increase competition and thus increase the degree of the individual world economies’ 202 UNDERSTANDING ASSET ALLOCATION integration. For a cyclical asset allocation (CAA) strategy to capture this global effect, it must be couched in terms of size and take into account both location and

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less intensively than U.S. farmers, so they enjoyed a clear competitive advantage over U.S. organic growers coming out of the gate. 204 UNDERSTANDING ASSET ALLOCATION Summary Natural endowments, government regulations, and many other variables combine to create pockets of market segmentation and product differentiation. It is in these markets

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short run. Investors and portfolio managers would obviously prefer to hold inelastic industries facing rising demand and elastic industries experiencing declining market conditions. 210 UNDERSTANDING ASSET ALLOCATION Elasticity and Profitability: Tax Rate Changes Indeed, investors and financial managers need to watch elasticities at all times. Before the enactment of the Tax

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S&P 500 index is tailor-made for empirically testing the desirability of a pure-passive strategy, a pure-active strategy, and a strategic asset allocation (SAA) and tactical asset allocation (TAA) to passive and active strategies. Visually analyzing the ratio of the cap-weighted to the equal-weighted S&P 500 reveals four

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becomes reasonable to ascertain the current economic environment as well as any presumed changes to it. The current environment and the estimated changes then dictate asset-allocation decisions. Because I believe different reaction coefficients exist for the different asset sectors, sizes, and styles, the CAA decision attempts to capture what I

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plan. The CAA framework logically formulates asset-class returns’ probability. The probabilities are then applied to an investor’s long-term goals, producing a recommended asset allocation that, once run through a quantitative framework, overweights the opportunistic sectors and underweights the Chapter 15 Putting It All Together: Value Timing 277 overvalued sectors

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bets are made. The derived implicit forecast must agree with the probability estimates and the overall macroeconomic outlook. Only then can one have a consistent asset allocation free of unintended bets. Historical experience more than confirms general economic factors impact stock prices in the aggregate. Changes in interest rates, inflation rates,

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’s core asset and the traditional benchmarks (betas) become the swing assets. For traditional portfolio construction, the latter represent the predominant factor risks. 290 UNDERSTANDING ASSET ALLOCATION BIBLIOGRAPHY 291 Adler, Michael, and Bernard Dumas. “International Portfolio Choice and Corporation Finance: A Synthesis.” Journal of Finance 38 (June 1983): 925–84. Aked,

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Ronald, Kenneth Reid, and Barr Rosenburg. “Persuasive Evidence of Market Inefficiency.” Journal of Portfolio Management 11 (1985): 9–17. Lee, Joan, and Don Phillips. “Tactical Asset Allocation: Differentiating Tactical Asset Allocation from Market Timing.” Financial Analysts Journal 45, No. 2 (March/April 1989): 14–16. Leibowitz, Martin. “The β-Plus Measure in

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Economics 57 (2000): 221–45. Lintner, John. “Security Prices, Risk and Maximal Gains from Diversification.” Journal of Finance 20 (December 1965): 587–615. 298 UNDERSTANDING ASSET ALLOCATION ———. “The Aggregation of Investors Diverse Judgments and Preferences in Purely Competitive Security Markets.” Journal of Financial and Quantitative Analysis 4 (December 1969): 347–400. Markowitz

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16 (1981): 439–62. Review & Outlook. “United We Default.” Wall Street Journal (May 12, 2005): A16. Samuelson, Paul. Economics. McGraw-Hill (1973). Sharpe, William F. “Asset Allocation: Management Style Performance Measurement.” Journal of Portfolio Management 18, No. 2 (Winter 1992): 7–19. ———. “Bonds Versus Stocks: Some Lessons from Capital Market Theory.” Financial

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stock-market index’s evolution. A passive investment strategy in which the portfolio is designed to mirror a stock-market index’s performance. 304 UNDERSTANDING ASSET ALLOCATION inflation hedging An investment designed to protect against inflation risk. Such an investment’s value typically increases with inflation. information ratio The expected return-to

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equity, the bonds are usually rated below investment grade. lifecycle fund A type of a fund structured between stocks and fixed income. Its overall asset allocation automatically adjusts to become more conservative as your expected retirement age approaches. long–short strategy A portfolio construction technique that traditionally has long positions in

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countries. regulatory burden Any aspect of legislation, regulation, or policy that could be made more efficient without dismissing the intended level of protections. 306 UNDERSTANDING ASSET ALLOCATION regulatory skirting An attempt to get around rules or regulations. relative performance A measure of performance that indicates how well it is doing relative to

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fixed costs, 184-185 annual returns for asset classes, 19 asset allocation. See also asset classes; cyclical asset allocation (CAA); strategic asset allocation (SAA) elasticity effect on, 213-217 fixed-income asset allocation, 25-26, 37-38, 119 location-based asset allocation, 24-25, 34-37, 125-126 long-run asset allocation, 40-43, 118, 127, 274-275, 285n periodic table

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firm for high-networth case study, 145-146, 149 Fisher effect, 96 fixed-income asset allocation cyclical asset allocation and, 37-39, 119 optimal mixes, 25-26 fixed-income cycles, 48-54 forecasts cyclical asset allocation (CAA) and, 100-101, 127-129 tactical asset allocation (TAA) and, 101 free trade elasticity and location effect, 187-189 PPP (

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193-198, 202-204, 213, 273-274 location portfolios, Sharpe ratio, 61-63 location-based asset allocation cyclical asset allocation and, 34-37, 125-126 optimal mixes, 24-25 London Interbank Offered Rate (LIBOR), 257 long-run asset allocation. See also strategic asset allocation (SAA) length of sample period, 285n optimal mixes, 40-43, 118, 127, 274-275

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Sharpe ratio, 2-3, 21 for benchmark portfolio, 114 for equal- and cap-weighted portfolios, 179 location portfolios, 61-63 location-based asset allocation, 35 size-based asset allocation, 32, 123 style-based asset allocation, 28, 121 T-bond/equity portfolios, 38, 119 Sharpe, William, 57 Siegel, Jeremy (Stocks for the Long Run), 25 single asset

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cap-weighted indexes, 175-180 hedge funds and, 235-239 market breadth and, 168-170, 237-238 in value-timing strategy, 243-250 size-based asset allocation cyclical asset allocation and, 31-32, 123 optimal mixes, 23-24 small-cap stocks active management tested against passive management, 166-168 annual returns, 19 elasticity, 184

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) versus, 59-65, 141-142 optimal mixes, 21-26 style cycles, 55-57 style differences, value versus growth stocks, 272-273 style-based asset allocation, 18 cyclical asset allocation and, 26-30, 121 optimal mixes, 22-23 supply shifts, 217-224 supply-and-demand analysis. See elasticity survivor bias, 228 swing assets, 290n

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, 26-30, 121 performance of, 16-17, 42 risk measurement, 20 style cycles, 55-57 tax-rate changes and, 75 value-timing asset allocation, 137-142 value-timing strategy cyclical asset allocation (CAA) as, 243-250 market-timing strategy versus, 276-277 variance, Sharpe ratio, 2 variance–covariance matrix, 21, 46 volatility, 2-

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk

by William J. Bernstein  · 12 Oct 2000

of professional money managers over the same period. I was fascinated by the T. Rowe Price data; here was a simple tool for ascertaining historical asset allocation performance—collect data on the prior performance of various asset classes, and “backtest” returns and risks. To my disappointment, I could find no readily available

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Gary Brinson, a noted money manager and financial analyst, and his colleagues published two sophisticated statistical studies of 82 large pension funds. They concluded that asset allocation accounted for over 90% of the return variability among the funds, with a less-than-10% contribution from market timing and actual stock and bond

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times as important as stock picking and market timing combined. In recent years many observers have suggested that the 90% figure is too high; perhaps asset allocation accounts for only 50% of return variability. Such arguments completely miss the point. Market timing and security selection are obviously important. The only problem is

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website, Efficient Frontier x Preface (http://www.efficientfrontier.com). The reaction to it exceeded my wildest expectations. The hunger of small investors for information about asset allocation and portfolio theory was gratifying, but the response that I received from investment professionals was completely unexpected. Yes, I was told, we all know how

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allocation that will do reasonably well under a wide range of circumstances. 5. Sticking by your target asset allocation through thick and thin is much more important than picking the right asset allocation. 63 64 The Intelligent Asset Allocator The Calculation of Optimal Allocations First of all, let’s be clear about what we mean when

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way to optimize portfolios— mean-variance analysis, devised several decades ago by Harry Markowitz (and for which he earned a Nobel Prize). A software Optimal Asset Allocations 65 application which uses this method is called a mean-variance optimizer (MVO). An MVO will rapidly compute optimal portfolio compositions from three sets of

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(Morningstar Objective Category); 20Y ⫽ 20-year Treasury bond; 5Y ⫽ 5-year Treasury note; TB ⫽ 30-day Treasury bill. 68 The Intelligent Asset Allocator Figure 5-1. Optimizer output, MVOPlus. Optimal Asset Allocations 69 Math Details: MVOPlus has the unique ability to identify the portfolio with the maximum annualized (geometric) return, whereas all other commercially

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the globalization of our economy, international diversification has lost its value. No one can doubt that our economic life is becoming increasingly globalized. The Optimal Asset Allocations 73 events in foreign capital markets seem to exert an instantaneous effect on our own, leading many to predict that the market returns of nations

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how this process works. Assume that you are a bold investor and have answered the three questions posed earlier in the chapter as follows: Optimal Asset Allocations 81 1. Complexity: moderate (level-two palette, plus precious metals) 2. Conventionality: low. You have determined that you can tolerate a large amount of

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funds stick to their hedging policies, you will be rewarded when the currency pendulum swings the other way, which it almost always does. Dynamic Asset Allocation Dynamic asset allocation refers to the possibility of varying your policy allocation because of changing market conditions. After spending much of this book convincing you of the virtue

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and never see the thing through. You cannot pilot a modern jet fighter before mastering the trainer; likewise, you should not attempt dynamic asset allocation before mastering fixed asset allocation. In the 1995 version of this book, I provided an example of how changing the stock and bond allocation in the opposite direction of

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Pacific Rim Small Company U.K. Small Company Continental Small Company Japanese Small Company Emerging Markets Emerging Markets Small-Cap Emerging Markets Value Implementing Your Asset Allocation Strategy 151 available are ETFs that index various foreign markets, known as World Equity Benchmark Securities, or WEBS. Here a much clearer recommendation can be

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and corporate yields can be considered the “price of safety.” When this gap is small, safety is cheap, and Treasuries should be purchased. Implementing Your Asset Allocation Strategy 153 Determining Your Precise Allocation In Chapter 5, we studied several different portfolios arranged according to risk, complexity, and conventionality. By now you should

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Taxable Accounts More definite recommendations can be made regarding rebalancing taxable accounts: Do so as sparingly as possible. In fact, a good case Implementing Your Asset Allocation Strategy 161 can be made for never rebalancing, considering the capital gains jolt you will get each time you do. First and foremost, selling your

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to every whim of the investing public. There are many funds which will provide you with what they consider to be the “optimal” asset allocation; these are called, naturally, asset-allocation funds. There are a few problems with these funds. First, they have not been around for very long, so it is hard to

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possible indexed global allocation. It would be nice if Vanguard offered a reasonable global index fund, but they do not. Their asset-allocation funds (Wellesley, Wellington, Asset Allocation, Life Strategies, STAR, and Global Asset Allocation) have the disadvantage of being grossly underweighted in foreign and small stocks. I do not recommend any of these funds. Lastly

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in the English language are “this time it’s different.” (The author will add the five dumbest words: “The bull market remains intact.”) Implementing Your Asset Allocation Strategy 165 Retirement—The Biggest Risk of All This book is focused primarily on the investment process, particularly the establishment and maintenance of efficient allocations

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Asks Your Advice Decades pass; you have all but taken over the family business from Uncle Fred, whose duties have become increasingly ceremonial. Implementing Your Asset Allocation Strategy 173 Your beloved uncle retains one important area of control: the retirement fund. Your younger cousin Harry is a fairly recent hire. One day

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have been performed by any small investor with similar software and ability. 3. Asset Allocation, by Roger Gibson. This covers much of the same ground as this book, with more emphasis on the qualities of individual assets. Oriented toward the

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and the underlying stocks.) Ask price: A broker’s price to sell a stock or bond; also called the offer price. 187 188 The Intelligent Asset Allocator Asset allocation: The process of dividing up one’s securities among broad asset classes, i.e., foreign and domestic stocks and foreign and domestic bonds. Asset class

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statute to remit 95% of earnings to shareholders. Rebalancing: The process of buying and selling portfolio components so as to maintain a target, or “policy” asset allocation. Regression analysis: A mathematical technique, available in most spreadsheet packages, which determines the relationship of multiple series of numbers. In finance, it is commonly employed

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Return from Common Stocks. M.I.T. Press, 1969. Graham, John R., and Harvey, Campbell R., “Market Timing Ability and Volatility Implied in Investment Newsletters’ Asset Allocation Recommendations.” National Bureau of Economic Research Working Paper No. 4890, 1995. Chapter 7 Clayman, Michelle, “In Search of Excellence: The Investor’s Viewpoint.” Financial Analysts

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Alpha, 89–90, 98 American Association of Individual Investors, 177 American Depositary Receipts (ADRs), 78 Annualized return, 2–3, 5 Asset Allocation (Gibson), 176 Asset-allocation funds, 162–164 Asset-allocation strategy, 26, 143–174 asset-allocation funds in, 162–164 bonds in, 151–152 determining allocation, 143–145, 153–154 dynamic, 137–139, 163–164 executing plan

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small versus big stocks in, 53–55, 75 Compound interest, 17 Constant allocation, 58 Contrarian approach, 59, 104 Contrarian Market Strategy (Dreman), 104 Conventionality, in asset allocation process, 78–79 Cooley, Philip L., 169 Corner portfolios, 65–71 Correlation, 36–40 among asset classes, 183–186 autocorrelation, 106–108 calculating, 39 defined

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D., is a practicing neurologist in Oregon. He launced the Web site www.efficient frontier.com in August 1996. Known for his quarterly journal of asset allocation and portfolio theory, Efficient Frontier, Dr. Bernstein is also a principal in the money management firm Efficient Frontier Advisors, is a frequent guest columnist for

All About Asset Allocation, Second Edition

by Richard Ferri  · 11 Jul 2010

YOUR PORTFOLIO Chapter 11 Realistic Market Expectations 219 Chapter 12 Building Your Portfolio 243 Chapter 13 How Behavior Affects Asset Allocation Decisions Chapter 14 When to Change Your Asset Allocation 291 Chapter 15 Fees Matter in Asset Allocation Planning 301 Appendix A: Research Web Sites 317 Appendix B: Recommended Reading Glossary Index 321 331 319 271

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costs, taxes, risk. Then let the markets take care of the rest. This approach has the highest probability of financial success. WHAT ASSET ALLOCATION CAN AND CANNOT DO A prudent asset allocation that is followed by discipline will increase your chances for reaching and maintaining financial security over your lifetime. That being said, no

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of risk. These differences make designing portfolios a multifaceted and challenging exercise. Accordingly, the information in this book cannot cover every scenario, and the asset allocation examples in this book should be viewed as examples, not recommendations. There is no one-sizefits-all solution, especially when people are approaching their preretirement

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in many different ways by many different people, ranging from losing money to the volatility of portfolio returns. Chapter 3 covers the technical aspects of asset allocation based on a two-asset-class portfolio. It covers basic formulas and historical market relationships. Chapter 4 expands into multi-assetclass investing. Adding more

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out your entire life’s savings. Bernie Madoff’s former clients know that too well. Planning for Investment Success 9 THE ASSETS IN ASSET ALLOCATION At its core, asset allocation is about dividing your wealth into different places to reduce the risk of a large loss. One hundred years ago, that may have meant

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are unsure of. Planning for Investment Success 21 INVESTMENT SELECTION Creating an appropriate portfolio is a two-step process. First, people should select an asset allocation mix that is best for their needs. Second, they should select individual investments that best represent those asset classes. The selection of investments to represent

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inflation, interestrate increases, taxes, and a potential default by the issuer. Portfolio risk cannot be eliminated although it can be partially controlled with an asset allocation strategy. Combining different investment types, each with its own unique risk and return characteristics, into one portfolio creates a unique risk and return tradeoff in

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risk level so that you have a high probability of meeting your unique financial needs and future obligations. This page intentionally left blank CHAPTER 3 Asset Allocation Explained KEY CONCEPTS ● ● ● ● Diversification reduces the chance of a large loss. Rebalancing assets in a portfolio helps contain risk. Correlations between asset classes are

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. There is no Nobel Prize in economics. There is only The Bank of Sweden Prize in Economic Sciences. Nonetheless, the idea revolutionized portfolio management. Asset Allocation Explained FIGURE 43 3-1 Portfolio total risk Diversification Reduces Stock-Specific Risk Stock-specific risk Market risk (beta) 2 20 50 100 200 400

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5.0% Hypothetical Portfolios 50% Investment 1 and 50% Investment 2, no rebalancing (let it ride) 50% Investment 1 and 50% Investment 2, rebalanced annually Asset Allocation Explained 47 Notice how differently the “let it ride” portfolio behaved compared to the rebalanced portfolio. Individually, both Investment 1 and Investment 2 earned a

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nothing for your long-term returns. There is also no benefit from purchasing new investments that have a consistently high positive correlation with other investments Asset Allocation Explained 49 already in your portfolio. This is a very common mistake that inexperienced investors make. During the late 1990s, many people thought that

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between Investments Reduces Risk Compounded return 100% Fund B 100% Fund A (0.5) Correlation Noncorrelation ⫹0.5 Correlation ⫹1.0 Correlation Standard deviation Asset Allocation Explained 53 Since it is so difficult to find investments that are negatively correlated, in practice most portfolios are composed of investments that either are

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positive correlation do have some diversification benefit, especially if you hold several types in a portfolio. THE TWO-ASSET-CLASS MODEL Finance professors begin teaching asset allocation techniques using two asset classes. The students learn about correlation, risk reduction, and the efficient frontier in a simple model of two investments that

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century ago. CHAPTER SUMMARY Portfolio diversification is the practice of buying several different investments to reduce the probability of a large loss in a portfolio. Asset allocation involves estimating the expected risk and return of various categories of investments, observing how those asset classes interrelate with one another, and then methodically

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constructing a portfolio of investments that have a high probability of achieving your goals with the lowest level of expected portfolio risk. No asset allocation is perfect. Correlations between asset classes change over time, and this causes changes in the diversification benefits. There may be periods when a diversification

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reasons to have some foreign stock exposure in a portfolio. Roger C. Gibson, CFA, CFP, is a well-known author on the subject of asset allocation. His first book, Asset Allocation: Balancing Financial Risk (McGraw-Hill), is a classic work on the subject. In March 1999, Gibson published an award-winning article in the

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appropriate for an investor with a longer investment time horizon who is simultaneously concerned about risk and return. It is a remarkably elegant and powerful asset allocation strategy. International equities include all publicly traded companies headquartered outside of the United States. The list includes large companies in developed nations, such as

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portfolio with fewer asset classes, within limitations. Any diversification benefit tends to diminish after about 12 different investments, and the maintenance cost required increases. Asset allocation requires just as much common sense as it does quantitative number crunching. Accordingly, your study of this strategy should not stop here. There are a

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fundamentally different from each other. Varying rolling correlation levels test for unique risk among asset classes. Liquid and low-cost funds should be accessible. Asset allocation is a simple concept that has several benefits. If you diversify your portfolio across several unlike investments that have real expected returns, you will reduce

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return higher than the inflation rate over time. 3. The asset class must be accessible with a low-cost diversified fund or product. Fundamentally Different Asset allocation is risk diversification. In order to have risk diversification, each investment in a portfolio must be fundamentally different from other investments. This provides the

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tax situation, and a variety of other factors. These considerations and others are discussed in Part Three of this book. CHAPTER SUMMARY At its core, asset allocation is a strategy of risk diversification. Different asset classes and categories have different risks that are not related to one another. Holding fundamentally different investments

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risk is expected in the future. SAMPLE INTERNATIONAL ALLOCATION Part Three of this book includes several samples of portfolios that have international stocks in the asset allocation. Generally, the allocation to international stocks is about 30 percent of the equity portion of the portfolio. Within the allocation, a sample of international

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To obtain maximum benefit, the fixed-income portion of the portfolio should also be broadly diversified into several different fixed-income categories and rebalanced annually. Asset allocation of fixed-income investments leads to higher overall returns with little increase in portfolio risk. There is no lack of diversification potential in the bond

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During midlife, long-term investment accounts are growing larger, and working years are growing shorter. A balanced asset allocation is appropriate. Figure 12-3 highlights the range of asset allocations that is typical for midlife accumulators. Like asset allocations for all groups, Figure 12-3 represents an either-or allocation, not a to-from allocation. Do

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can easily calculate the amount of income your investments will give you and then take any shortfall during a rebalancing. Transitional Retirees—Asset Allocation Figure 12-4 highlights an appropriate asset allocation for people transitioning into retirement and already in an early retirement stage. The transition from working to retirement is an uncertain time

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points of contact. 4. Insist that the person you choose to manage your estate understand basic financial principles including asset allocation and why you are using low-cost mutual funds. Mature Retirees—Asset Allocation The asset allocation of a mature retiree’s portfolio can vary depending on who is going to use the money. There should

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40 percent allocation to bonds and a 60 percent equity allocation because she is in a much better financial situation. CHAPTER SUMMARY Selecting an appropriate asset allocation during all phases of life is essential to your long-term investment plan. A successful investment plan incorporates the basic necessities of broad diversification,

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you through retirement and eventually be passed on your heirs. A life-cycle methodology is one strategy for beginning your quest to discover an appropriate asset allocation. The asset allocation and investment selections for the four stages of life provided here are only guides. You will need to adjust the portfolios to fit your

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. It presupposes that investors also understand the nature of risk and return in various markets, including the correlations between each market, when creating an asset allocation. Once an investment plan has been designed and implemented, the theory expects that rebalancing will occur in a disciplined manner to capture a diversification benefit

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process. A fledgling field of study in the early 1960s, behavioral finance has grown to be an important area of research at How Behavior Affects Asset Allocation Decisions 273 several influential institutions. Professors recognized as experts in the field include Daniel Kahneman (Princeton), Meir Statman (Santa Clara), Richard Thaler (University of

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view of the markets than men do. They maintain an investment plan longer, and as a result they generally perform better. 274 CHAPTER 13 Asset allocation strategies are based on rational decisions and the discipline to maintain those decisions. Unfortunately, individual investors can become quite irrational when it comes to investment

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large swings in the markets. Successful investors understand the limitations of the markets as well as their own limitations, and they develop a proper asset allocation that accommodates both. MORE INTERESTING INFORMATION One surprising aspect of behavioral finance research is that a majority of individual investors surveyed know that they don

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Internet for free. A virtual clearinghouse of behavioral finance studies can be found at www.behaviouralfinance.net. DISCOVERING YOUR RISK TOLERANCE After formulating an appropriate asset allocation based on your assets and your future liabilities, the other side of the coin is your tolerance for investment risk. Risk tolerance is a

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your investment plan through good times and bad. AN EXAMPLE OF THE STRESS TEST The following is a detailed example of an asset allocation stress test. It suggests an initial asset allocation to an investor and then stress-tests the allocation to observe how the investor reacts to a volatility shock. If an emotional

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if she is inclined to abandon her investment plan after losing money, then the 70 percent stock and 30 percent bond portfolio asset allocation is too aggressive. A less aggressive asset allocation should be implemented from the start. The financial planner suggests a moderate allocation using a 40 percent stock and 60 percent bond

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during all market conditions. Discipline in maintaining strategy is an essential element of investment success. REBALANCING FINANCIAL RISK Portfolio rebalancing is a fundamental part of asset allocation. Rebalancing reduces portfolio risk and creates a diversification benefit in the form of a higher long-term return. There are many methods of rebalancing

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investors avoid sophisticated rebalancing strategies. For simplicity, annual rebalancing is practical and the one used throughout this book. Annual rebalancing captures How Behavior Affects Asset Allocation Decisions 285 most of the diversification benefit that other options provide without having you spend a lot of time or money on the process. There

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This page intentionally left blank CHAPTER 14 When to Change Your Asset Allocation KEY CONCEPTS ● ● ● ● Asset allocation decisions are typically not permanent. Life changes lead to asset allocation changes. Too much risk in a portfolio should be managed downward. Estate planning needs eventually set asset allocation. Asset allocation changes can take two forms. The first is based on changing needs

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you recognize the symptoms of too much risk early and deal with the situation appropriately. This page intentionally left blank CHAPTER 15 Fees Matter in Asset Allocation Planning KEY CONCEPTS ● ● ● ● Expenses have a direct impact on investment returns and should be low. Taxes can be controlled through proper management. Discipline is

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the key to investment success. Professional investment advisors can provide assistance. Successful asset allocation is all about planning, implementation, and investment discipline. It involves proper investment selection based on your needs and regular maintenance. Effective cost controls including tax

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. Two good sources for current information on new ETFs are www.IndexUniverse.com and www.ETFguide.com. HIRING A LOW-FEE ADVISOR The process of asset allocation can be difficult for some investors and an unwelcome chore for others. The design, implementation, monitoring, rebalancing, tax management, and occasional reassessment of strategy

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C. Bogle, founder and former chairman of the Vanguard Group. This unbiased online community of investors will help answer the questions you have about asset allocation and investment selection. DFAfunds.com Dimensional Fund Advisors offers unique index funds through advisors. Its three-factor approach to portfolio construction is gaining acceptance worldwide

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, and multi-assetclass portfolios. PortfolioSolutions.com The main Web site of my firm, Portfolio Solutions, LLC. We are a leading investment advisor specializing in asset allocation and low-cost investing. Russell.com This site provides comprehensive information about all the Russell indexes and methodologies. Spglobal.com Standard & Poor’s offers comprehensive

Fixed: Why Personal Finance is Broken and How to Make it Work for Everyone

by John Y. Campbell and Tarun Ramadorai  · 25 Jul 2025

important first step, it is not sufficient. Retirement savers must also confront the difficult problem of asset allocation and must remain keenly sensitive to the fees charged by asset managers. Two obvious mistakes in retirement asset allocation were discussed in chapter 6. Failure to participate in asset markets is a mistake because even the

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as price discounts. Even then, the allocation to employer stock should be modest. It is one thing to avoid the most extreme mistakes in retirement asset allocation, but another thing to follow a wise investment strategy over an entire working lifetime. Fortunately, financial products have emerged that make it easier for people

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are a type of mutual fund that has become increasingly popular in the United States in recent years and is commonly offered as a default asset allocation for US 401(k) plans.22 These funds consist of diversified portfolios of stocks and long-term bonds. They maintain a relatively stable

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asset allocation in the face of market movements, rebalancing periodically to prespecified weights in the stock market and the bond market. The weights themselves are adjusted slowly

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which they expect to retire. Specifically, the weight in stocks declines and the weight in bonds increases as retirement approaches. What justifies this approach to asset allocation? The emphasis on long-run assets follows from the need for stable income over a long period of time, which bonds and stocks can better

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weight to fixed-income markets for young investors. Others charge high fees for active equity management with little gain in performance. And while they condition asset allocation on an investor’s age, target date funds do not take into account the amount of wealth relative to income that the investor has already

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accumulated, which should affect asset allocation and which depends on the contribution start date, the history of contributions, the evolution of income, and the performance of financial markets.26 There is

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systems and the traps that unsuspecting people can fall into when deciding about their participation in employer-provided retirement plans, their retirement savings rates and asset allocation, and their spending plans during retirement. These problems urgently need solutions. Retirement financing decisions made today can have painful impacts many years into the future

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is in retirement savings, where newly employed households are defaulted into participating in their employer’s retirement plan, with a moderate contribution rate and diversified asset allocation. Such strategies received a fillip from early research showing that default options can achieve retirement plan participation rates above 85% among new employees—twice the

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may be priced out of the financial advice marketplace altogether. However, the growth of automated financial advice (“robo-advice”) weakens this argument considerably as algorithmic asset allocation can satisfy fiduciary duty at relatively low cost. When imposing fiduciary duties, governments should be aware that ordinary people may not understand which job titles

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earning power, driven by differences in their savings rates or the returns they experience in the stock market. Governments should promote products that automatically alter asset allocation in response to these factors. A reader may well ask how these suggestions fit together and what our vision is for the long-run future

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the sort we have already recommended for small contributors to traditional retirement accounts, can help overcome these barriers. Asset Allocation in Retirement Accounts The tax benefits of retirement savings accounts justify a restrictive approach to asset allocation, taking some decisions out of the individual’s hands. At the least, investments in these accounts should

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to be held in starter-kit retirement accounts should be primarily target date funds: combinations of bond and stock index funds that automatically shift the asset allocation of equities, debt, and cash over time as an investor’s target retirement date comes closer. These funds help to solve the investor’s lifecycle

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asset allocation problem, by leaning more heavily towards equities early in working life and becoming more conservative—shifting toward fixed-income securities—as the investor approaches retirement.

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they have benefited from a period of rising stock prices—should cut back risk. More sophisticated target date funds could go beyond simple age-dependent asset allocation and make the allocation vary according to the balance in the fund as well.33 Annuities and Reverse Mortgages Upon retirement, even people who have

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. John Y. Campbell and Luis M. Viceira, “Who should buy long-term bonds?,” American Economic Review 91 (2001): 99–127; and Campbell and Viceira, Strategic Asset Allocation: Portfolio Choice for Long-Term Investors (Oxford University Press, 2002). 21. Shlomo Benartzi, “Excessive extrapolation and the allocation of 401(k) accounts to company stock

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–30, for more details on the growing popularity of target date funds. 23. Campbell and Viceira, Strategic Asset Allocation; John Y. Campbell, Y. Lewis Chan, and Luis M. Viceira, “A Multivariate Model of Strategic and Asset Allocation,” Journal of Financial Economics 67 (2003): 41–80; and Jeremy J. Siegel, Stocks for the Long Run

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is the product R × W. If W rises when R declines, the product R × W can remain stable over time. 24. Campbell and Viceira, Strategic Asset Allocation. People working in the financial industry who receive annual bonuses that fluctuate with the level of the stock market have income that is more equity

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. However, if people do become more risk averse as they age, that further strengthens the case for a conservative asset allocation later in life. 26. Magnus Dahlquist, Ofer Setty, and Roine Vestman, “On the asset allocation of a default pension fund,” Journal of Finance 73 (2018): 1893–1936, explore these effects. Francisco Gomes, Alexander

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’ private equity liquidity,” Financial Times, April 16, 2024, https://www.ft.com/content/cc6601df-4663-43a0-87b2-822eaabe4a81. 32. John Campbell and Luis Viceira, Strategic Asset Allocation (Oxford University Press, 2002), chapter 7, present a conceptual discussion of this point. 33. Magnus Dahlquist, Ofer Setty, and Roine Vestman, “On the

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asset allocation of a default pension fund,” Journal of Finance 73 (2018): 1893–1936; and Francisco Gomes, Alexander Michaelides, and Yuxin Zhang, “Tactical target date funds,” Management

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, 312–313n65 artificial intelligence (AI): bias and, 189; fintech and, 180; patents, 301n1 Asimov, Isaac, 184–185 asset accumulation, paying off debt to enable, 268n22 asset allocation: diversification and, 292n13; in retirement accounts, 165–169, 257–259 asset management fees, 137–138 asset management skill, 137 assets, allowing people with limited resources

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, 205–207; to other businesses, 209–211; starter-kit fee, 238–239 discriminatory algorithms, 189, 197–198 disposition effect, 272n22 distributed digital ledger, 190 diversification: asset allocation and, 292n13; direct investments and, 26; equity participation and, 131–134; growth of wealth and, 269n31; limiting risk, 26; naive, 293n16; retirement savings/investment and

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–9 retirement, 150–175; global middle-class struggle to fund, 13–14; living in, 169–175; longer life, fewer children, and, 150–156 retirement accounts: asset allocation, 165–169, 257–259; contribution limits, 297n7; default options and, 212, 213–214; fees, 258; liquidity management and, 258–259; micro- pensions, 257; reluctance to

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in, 230, 258, 259; tax-favored, 156–159, 217, 255–256; withdrawals from, 255–257 retirement financing, 254–261; annuities and reverse mortgages, 259–261; asset allocation in retirement accounts, 165–169, 257–259 retirement portfolio, Enron bankruptcy and loss of, 3–4, 133, 167 retirement savings, 156–165; amount required, 159

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stamp tax, 113 standard deviation, 131, 132, 280n2, 292n10 Starmer, Keir, 25 starter kit for personal finance, 235–237; annuities and reverse mortgages, 259–261; asset allocation in retirement accounts, 257–259; beyond the, 261–262; educational debt, 244–246; financing large investments, 244–250; investments, 250–251; long-term insurance, 253

Algorithms to Live By: The Computer Science of Human Decisions

by Brian Christian and Tom Griffiths  · 4 Apr 2016  · 523pp  · 143,139 words

optimal portfolio allocation scheme requires having good estimates of the statistical properties of different investments. An error in those estimates can result in very different asset allocations, potentially increasing risk. In contrast, splitting your money evenly across stocks and bonds is not affected at all by what data you’ve observed. This

The Permanent Portfolio

by Craig Rowland and J. M. Lawson  · 27 Aug 2012

to over 35% of the total, then you reset all four parts to 25%. That's it. That's all the work involved. Because this asset allocation is diversified, the entire portfolio performs well under most circumstances. Browne writes: “The portfolio's safety is assured by the contrasting qualities of the four

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Now that the background of the strategy has been discussed, we can look more closely at the approach that evolved into the following deceptively simple asset allocation: 25 percent—Stocks 25 percent—Bonds 25 percent—Cash 25 percent—Gold The allocation above is the strategy in its most basic conceptual form. Now

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it with less risk, less management, lower costs, and more profits to compound. The Permanent Portfolio still remains not only one of the most simple asset allocations you are likely to encounter, but also one of the best in terms of risk versus return. Note 1. Personal interview with John Chandler, Harry

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the proceeds to buy a new 25- to 30-year bond to replace it, if needed. 4. Repeat the process as appropriate to maintain your asset allocation. If the above intimidates you, don't worry. There are a few long-term Treasury bond funds that are appropriate for use with the Permanent

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an investment, don't buy it. Modifying the Permanent Portfolio A common theme in discussions about the Permanent Portfolio involves various ways of modifying the asset allocation from the 4 × 25 percent split to something else. Although these efforts at improving the Permanent Portfolio's performance are presumably undertaken with the best

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AJPM Precious Metals American Precious Metals Exchange Amundi Exchange Traded Funds Argentina, economy and investments in Asia, economy and investments in. See also specific countries Asset allocation. See also Bonds; Cash; Gold; Stocks asset class correlations, relying on asset correlation to economy assets in isolation balanced diversification of (see Diversification) hard assets

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Sovereign Eurozone 25+ Default risk Deflation: bonds impacted by economic condition of gold impacted by Depressions. See Recessions and depressions Developing country investing Diversification: asset allocation and (see Asset allocation) asset class correlations and asset-economy correlation and cash reserves for failure of financial safety through geographic hard asset neglect lacking illusion of implementation

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SPIVA report on stability impacting stock survivorship bias in reports on volatility impacting (see Market volatility) Permanent Exchange Traded Fund, Global X Permanent Portfolio: asset allocation in (see Asset allocation; Bonds; Cash; Gold; Stocks) commercial Permanent Portfolio funds description of diversification in (see Diversification) flexibility of, to expect unexpected Golden Rules of financial safety

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safe deposit boxes in Swiss Bank gold Swiss francs Swiss Gold ETF Swiss Physical Gold ETF types of Swiss banks Taxes: active vs. passive investment asset allocation and bond-related capital gains cash-related collectible gains commercial Permanent Portfolio fund tax considerations dividend geographic diversification tax considerations gold-related institutional diversification considerations

J.K. Lasser's Your Income Tax 2022: For Preparing Your 2021 Tax Return

by J. K. Lasser Institute  · 21 Dec 2021

's basis for income tax purposes includes the estate tax value of property included in the decedent's estate. 5.19 Allocating Cost Among Several Assets Allocation of basis is generally required in these cases: when the property includes land and building; the land is to be divided into lots; securities or

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file:///C:/Documents%20and%...

by vpavan

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest

by Andrew W. Lo and Stephen R. Foerster  · 16 Aug 2021  · 542pp  · 145,022 words

Safe Haven: Investing for Financial Storms

by Mark Spitznagel  · 9 Aug 2021  · 231pp  · 64,734 words

The Simple Path to Wealth (Revised & Expanded 2025 Edition): Your Road Map to Financial Independence and a Rich, Free Life

by JL Collins  · 191pp  · 66,998 words

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future

by Andy Bell  · 12 Sep 2013  · 348pp  · 82,499 words

The Price of Time: The Real Story of Interest

by Edward Chancellor  · 15 Aug 2022  · 829pp  · 187,394 words

Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required

by Kristy Shen and Bryce Leung  · 8 Jul 2019  · 389pp  · 81,596 words

The Soul of Wealth

by Daniel Crosby  · 19 Sep 2024  · 229pp  · 73,085 words

Irrational Exuberance: With a New Preface by the Author

by Robert J. Shiller  · 15 Feb 2000  · 319pp  · 106,772 words

Wall Street: How It Works And for Whom

by Doug Henwood  · 30 Aug 1998  · 586pp  · 159,901 words

Retirementology: Rethinking the American Dream in a New Economy

by Gregory Brandon Salsbury  · 15 Mar 2010  · 261pp  · 70,584 words

Your Money: The Missing Manual

by J.D. Roth  · 18 Mar 2010  · 519pp  · 118,095 words

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues

by Alain Ruttiens  · 24 Apr 2013  · 447pp  · 104,258 words

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett

by Jack (edited By) Guinan  · 27 Jul 2009  · 353pp  · 88,376 words

Adaptive Markets: Financial Evolution at the Speed of Thought

by Andrew W. Lo  · 3 Apr 2017  · 733pp  · 179,391 words

Be Your Own Financial Adviser: The Comprehensive Guide to Wealth and Financial Planning

by Jonquil Lowe  · 14 Jul 2010  · 433pp  · 53,078 words

The Asian Financial Crisis 1995–98: Birth of the Age of Debt

by Russell Napier  · 19 Jul 2021  · 511pp  · 151,359 words

Principles of Corporate Finance

by Richard A. Brealey, Stewart C. Myers and Franklin Allen  · 15 Feb 2014

Heads I Win, Tails I Win

by Spencer Jakab  · 21 Jun 2016  · 303pp  · 84,023 words

Frequently Asked Questions in Quantitative Finance

by Paul Wilmott  · 3 Jan 2007  · 345pp  · 86,394 words

Money Changes Everything: How Finance Made Civilization Possible

by William N. Goetzmann  · 11 Apr 2016  · 695pp  · 194,693 words

Capital Ideas: The Improbable Origins of Modern Wall Street

by Peter L. Bernstein  · 19 Jun 2005  · 425pp  · 122,223 words

Simple Rules: How to Thrive in a Complex World

by Donald Sull and Kathleen M. Eisenhardt  · 20 Apr 2015  · 294pp  · 82,438 words

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone

by David Carey  · 7 Feb 2012  · 421pp  · 128,094 words

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds

by Maneet Ahuja, Myron Scholes and Mohamed El-Erian  · 29 May 2012  · 302pp  · 86,614 words

Risk Management in Trading

by Davis Edwards  · 10 Jul 2014

The Death of Money: The Coming Collapse of the International Monetary System

by James Rickards  · 7 Apr 2014  · 466pp  · 127,728 words

Take the Money and Run: Sovereign Wealth Funds and the Demise of American Prosperity

by Eric C. Anderson  · 15 Jan 2009  · 264pp  · 115,489 words

Blockchain: Blueprint for a New Economy

by Melanie Swan  · 22 Jan 2014  · 271pp  · 52,814 words

Work Optional: Retire Early the Non-Penny-Pinching Way

by Tanja Hester  · 12 Feb 2019  · 231pp  · 76,283 words

Extreme Early Retirement: An Introduction and Guide to Financial Independence (Retirement Books)

by Clayton Geoffreys  · 16 May 2015  · 44pp  · 13,346 words

Bulletproof Problem Solving

by Charles Conn and Robert McLean  · 6 Mar 2019

Getting Things Done: The Art of Stress-Free Productivity

by David Allen  · 31 Dec 2002  · 300pp  · 79,315 words

Triumph of the Optimists: 101 Years of Global Investment Returns

by Elroy Dimson, Paul Marsh and Mike Staunton  · 3 Feb 2002  · 353pp  · 148,895 words

The Intelligent Investor (Collins Business Essentials)

by Benjamin Graham and Jason Zweig  · 1 Jan 1949  · 670pp  · 194,502 words

How Markets Fail: The Logic of Economic Calamities

by John Cassidy  · 10 Nov 2009  · 545pp  · 137,789 words

Rigged Money: Beating Wall Street at Its Own Game

by Lee Munson  · 6 Dec 2011  · 236pp  · 77,735 words

The Behavioral Investor

by Daniel Crosby  · 15 Feb 2018  · 249pp  · 77,342 words

Handbook of Modeling High-Frequency Data in Finance

by Frederi G. Viens, Maria C. Mariani and Ionut Florescu  · 20 Dec 2011  · 443pp  · 51,804 words

A Man for All Markets

by Edward O. Thorp  · 15 Nov 2016  · 505pp  · 142,118 words

The Dhandho Investor: The Low-Risk Value Method to High Returns

by Mohnish Pabrai  · 17 May 2009  · 172pp  · 49,890 words

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever

by Robin Wigglesworth  · 11 Oct 2021  · 432pp  · 106,612 words

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile

by Alexander Davidson  · 1 Apr 2008  · 368pp  · 32,950 words

Endless Money: The Moral Hazards of Socialism

by William Baker and Addison Wiggin  · 2 Nov 2009  · 444pp  · 151,136 words

How to Speak Money: What the Money People Say--And What It Really Means

by John Lanchester  · 5 Oct 2014  · 261pp  · 86,905 words

The Ascent of Money: A Financial History of the World

by Niall Ferguson  · 13 Nov 2007  · 471pp  · 124,585 words

Your Money or Your Life: 9 Steps to Transforming Your Relationship With Money and Achieving Financial Independence: Revised and Updated for the 21st Century

by Vicki Robin, Joe Dominguez and Monique Tilford  · 31 Aug 1992  · 426pp  · 115,150 words

Makers and Takers: The Rise of Finance and the Fall of American Business

by Rana Foroohar  · 16 May 2016  · 515pp  · 132,295 words

Nerds on Wall Street: Math, Machines and Wired Markets

by David J. Leinweber  · 31 Dec 2008  · 402pp  · 110,972 words

The Wisdom of Crowds

by James Surowiecki  · 1 Jan 2004  · 326pp  · 106,053 words

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis

by James Rickards  · 15 Nov 2016  · 354pp  · 105,322 words

Finding Alphas: A Quantitative Approach to Building Trading Strategies

by Igor Tulchinsky  · 30 Sep 2019  · 321pp

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them

by Nouriel Roubini  · 17 Oct 2022  · 328pp  · 96,678 words

Boom: Bubbles and the End of Stagnation

by Byrne Hobart and Tobias Huber  · 29 Oct 2024  · 292pp  · 106,826 words

Think Twice: Harnessing the Power of Counterintuition

by Michael J. Mauboussin  · 6 Nov 2012  · 256pp  · 60,620 words

Buffett

by Roger Lowenstein  · 24 Jul 2013  · 612pp  · 179,328 words

Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence

by Jerry Kaplan  · 3 Aug 2015  · 237pp  · 64,411 words

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It

by Steven Brill  · 28 May 2018  · 519pp  · 155,332 words

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All

by Mary Childs  · 15 Mar 2022  · 367pp  · 110,161 words

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis

by Scott Patterson  · 5 Jun 2023  · 289pp  · 95,046 words

Space Chronicles: Facing the Ultimate Frontier

by Neil Degrasse Tyson and Avis Lang  · 27 Feb 2012  · 476pp  · 118,381 words

Who Stole the American Dream?

by Hedrick Smith  · 10 Sep 2012  · 598pp  · 172,137 words

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street

by Justin Fox  · 29 May 2009  · 461pp  · 128,421 words

Superclass: The Global Power Elite and the World They Are Making

by David Rothkopf  · 18 Mar 2008  · 535pp  · 158,863 words

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis

by Martin Wolf  · 24 Nov 2015  · 524pp  · 143,993 words

Augmented: Life in the Smart Lane

by Brett King  · 5 May 2016  · 385pp  · 111,113 words

The 5 Types of Wealth: A Transformative Guide to Design Your Dream Life

by Sahil Bloom  · 4 Feb 2025  · 363pp  · 94,341 words

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

by Richard Bookstaber  · 5 Apr 2007  · 289pp  · 113,211 words

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms

by Russell Napier  · 18 Jan 2016  · 358pp  · 119,272 words

Only Humans Need Apply: Winners and Losers in the Age of Smart Machines

by Thomas H. Davenport and Julia Kirby  · 23 May 2016  · 347pp  · 97,721 words

Design of Business: Why Design Thinking Is the Next Competitive Advantage

by Roger L. Martin  · 15 Feb 2009

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street

by William Poundstone  · 18 Sep 2006  · 389pp  · 109,207 words

The Option of Urbanism: Investing in a New American Dream

by Christopher B. Leinberger  · 15 Nov 2008  · 222pp  · 50,318 words

Nomad Capitalist: How to Reclaim Your Freedom With Offshore Bank Accounts, Dual Citizenship, Foreign Companies, and Overseas Investments

by Andrew Henderson  · 8 Apr 2018  · 403pp  · 110,492 words

The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham

by Joe Carlen  · 14 Apr 2012  · 398pp  · 111,333 words

Competition Demystified

by Bruce C. Greenwald  · 31 Aug 2016  · 482pp  · 125,973 words

Concentrated Investing

by Allen C. Benello  · 7 Dec 2016

Extreme Money: Masters of the Universe and the Cult of Risk

by Satyajit Das  · 14 Oct 2011  · 741pp  · 179,454 words

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions

by Joshua Rosenbaum, Joshua Pearl and Joseph R. Perella  · 18 May 2009  · 444pp  · 86,565 words

Reimagining Capitalism in a World on Fire

by Rebecca Henderson  · 27 Apr 2020  · 330pp  · 99,044 words

Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals

by David Aronson  · 1 Nov 2006

The Impulse Society: America in the Age of Instant Gratification

by Paul Roberts  · 1 Sep 2014  · 324pp  · 92,805 words

Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers

by Timothy Ferriss  · 6 Dec 2016  · 669pp  · 210,153 words

The End of Work: Why Your Passion Can Become Your Job

by John Tamny  · 6 May 2018  · 165pp  · 47,193 words

How to Retire the Cheapskate Way

by Jeff Yeager  · 1 Jan 2013  · 212pp  · 70,224 words

Connectography: Mapping the Future of Global Civilization

by Parag Khanna  · 18 Apr 2016  · 497pp  · 144,283 words

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class

by Paul Pierson and Jacob S. Hacker  · 14 Sep 2010  · 602pp  · 120,848 words

Mastering Book-Keeping: A Complete Guide to the Principles and Practice of Business Accounting

by Peter Marshall  · 1 Feb 1997

Private Equity: A Memoir

by Carrie Sun  · 13 Feb 2024  · 267pp  · 90,353 words

The Long Good Buy: Analysing Cycles in Markets

by Peter Oppenheimer  · 3 May 2020  · 333pp  · 76,990 words

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History

by Diana B. Henriques  · 18 Sep 2017  · 526pp  · 144,019 words

Market Wizards: Interviews With Top Traders

by Jack D. Schwager  · 7 Feb 2012  · 499pp  · 148,160 words

Getting Started With Ledger

by Rolf Schröder

How to DeFi

by Coingecko, Darren Lau, Sze Jin Teh, Kristian Kho, Erina Azmi, Tm Lee and Bobby Ong  · 22 Mar 2020  · 135pp  · 26,407 words

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace

by Matthew C. Klein  · 18 May 2020  · 339pp  · 95,270 words

Exit Strategy

by Sherry Walling, Rob Walling  · 22 Nov 2024  · 215pp  · 60,241 words

Principles: Life and Work

by Ray Dalio  · 18 Sep 2017  · 516pp  · 157,437 words

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors

by Wesley R. Gray and Tobias E. Carlisle  · 29 Nov 2012  · 263pp  · 75,455 words

When the Wolves Bite: Two Billionaires, One Company, and an Epic Wall Street Battle

by Scott Wapner  · 23 Apr 2018  · 302pp  · 80,287 words

A Primer for the Mathematics of Financial Engineering

by Dan Stefanica  · 4 Apr 2008

The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means

by Jeff Yeager  · 8 Jun 2010  · 189pp  · 64,571 words

Big Mistakes: The Best Investors and Their Worst Investments

by Michael Batnick  · 21 May 2018  · 198pp  · 53,264 words

Money Moments: Simple Steps to Financial Well-Being

by Jason Butler  · 22 Nov 2017  · 139pp  · 33,246 words

The Social Animal: The Hidden Sources of Love, Character, and Achievement

by David Brooks  · 8 Mar 2011  · 487pp  · 151,810 words

Meet the Frugalwoods: Achieving Financial Independence Through Simple Living

by Elizabeth Willard Thames  · 6 Mar 2018  · 179pp  · 59,704 words

Analysis of Financial Time Series

by Ruey S. Tsay  · 14 Oct 2001

The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg)

by Liam Vaughan and Gavin Finch  · 22 Nov 2016

The Misbehavior of Markets: A Fractal View of Financial Turbulence

by Benoit Mandelbrot and Richard L. Hudson  · 7 Mar 2006  · 364pp  · 101,286 words

American Foundations: An Investigative History

by Mark Dowie  · 3 Oct 2009  · 410pp  · 115,666 words

Solutions Manual - a Primer for the Mathematics of Financial Engineering, Second Edition

by Dan Stefanica  · 24 Mar 2011

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud

by Ben McKenzie and Jacob Silverman  · 17 Jul 2023  · 329pp  · 99,504 words

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry

by Helaine Olen  · 27 Dec 2012  · 375pp  · 105,067 words

Why Stock Markets Crash: Critical Events in Complex Financial Systems

by Didier Sornette  · 18 Nov 2002  · 442pp  · 39,064 words

The Quants

by Scott Patterson  · 2 Feb 2010  · 374pp  · 114,600 words

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction

by Richard Bookstaber  · 1 May 2017  · 293pp  · 88,490 words

The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life

by Nick Maggiulli  · 22 Jul 2025

Straight Flush: The True Story of Six College Friends Who Dealt Their Way to a Billion-Dollar Online Poker Empire--And How It All Came Crashing Down . . .

by Ben Mezrich  · 27 May 2013  · 233pp  · 71,342 words

A Splendid Exchange: How Trade Shaped the World

by William J. Bernstein  · 5 May 2009  · 565pp  · 164,405 words

The Automatic Customer: Creating a Subscription Business in Any Industry

by John Warrillow  · 5 Feb 2015  · 186pp  · 49,251 words

Why I Left Goldman Sachs: A Wall Street Story

by Greg Smith  · 21 Oct 2012  · 304pp  · 99,836 words