I’ve been doing a lot of reading on Asset Allocation this morning and here are a few key takeaways that I think might be helpful to investors:
- Static allocations assume the relationships between the various asset classes stay the same. Dynamic allocations assume that the relationships are constantly changing. Look back over the past five years and you can see how the relationships are in constant state of fluctuation.
- Dynamic asset allocation can be accomplished with frequent reviews, opportunistic components, and flexible strategies. It’s more active than static, and requires more effort and time.
- Leveraging a portfolio (borrowing money to buy more of a certain asset class) to create risk parity across each asset class can reduce the overall risk of the portfolio while providing acceptable returns. This can be complicated to do on your own and comes with its own set of risks and higher costs (cost to borrow money).
- Marcus Schlumerich, author of The Efficient Frontier in Modern Portfolio Theory, got it right when he stated that “a portfolio is efficient if no other portfolio has the same expected return with lower volatility.”
- A growing trend in asset allocation goes beyond the standard 60/40 split between stocks and bonds. New research suggests a broader and deeper use of asset classes can help to reduce risk.
- Due diligence is becoming increasingly important as new asset classes in the alternative space emerge.
- Asset classes are cyclical and respond based on economic environments. Changing economic environments cannot be predicted. Portfolios need to be designed with that in mind.
It’s nice to see new research supporting strategies that have already been implemented in our client portfolios. If you’re interested in putting the Asset Allocation approach to work in your own investment portfolio, please feel free to contact us.