Thoughts About Asset Aloocation - 2
Back on January 12th, we posted what was purported to be first installment of "All About How to Allocate Your Assets." It's not a bad first pass on what can be a complicated subject. We then concluded by saying we'd "continue exploring the question of how to allocate your assets."
Almost three months later, we're doing just that. It seems the original intent at succeeding "installments" was a bit ambitious - especially considering that we once - years ago - started what we thought would be a comprehensive look at asset allocation. That aborted effort began with good intentions, as did this one. Then, we were among those who were disturbed at how many people lost basically a ton of money in 2008-2009 who had asset allocations that were supposed to protect them from big losses.
The classic case would be the ubiquitous 60% stocks/40% bonds portfolio. People who held assets in this "conservative" allocation lost something in the area of 30%. Better than the 40% or more that people lost who held only stocks, but shocking nonetheless. Clearly 60/40 didn't protect your downside during the crisis. Bonds, which were supposed to provide balance and counter-weight to stocks did no such thing.
The bigger complaint came from erstwhile proponents of what is known as Modern Portfolio Theory. They too were slammed in ways they had not predicted or anticipated. Their so-called "efficient" portfolios were only efficient at losing money. And MPT couldn't seem to explain why. At first, we thought we'd join the hunt for an answer, but the pursuit became more involved than we had anticipated as we kept 1) discovering more and more about asset allocation that wasn't taught in formal training and education; 2) running out of time to both research and then write about what we were learning. And so our first stab went the route of many human ambitions: it died on the vine. But we did continue learning, even as we stopped writing about it.
And so we arrive, three months after this latest ambition energized us at the start of the New Year, at a decision. Rather than think of this as some comprehensive, never mind authoritative, exploration of how to allocate assets, we'll just share, from time to time, what we've learned and what we continue to learn. Ahh...that feels better: no promises, no over-ambitious commitment; frankly only a vague idea of where this will all lead. Will we find better ways than we currently have to allocate assets? Will any of these be applicable to you? Can we express these possibly better ways in simple language that might prove helpful to others? Only time will tell.
For today, we simply point out that the concept of "diversification" took on new life after 2008-2009.
Some retail investors, and a few more professionals, who were not diversified as they thought they were, woke up and spread out their money over more than just stocks and bonds. Others, noting that just about every asset class declined precipitously during the crisis, decided that even broad diversification wasn't enough. What was needed was some way to not only spread out, but to shift their money amongst asset classes in response to current and anticipated conditions in the markets and the economy. Add to this the reams of data now at our disposal and the increasingly robust and complex manner this data can be sorted and whole new categories of allocations were developed and continue to be developed for those able and willing to grasp the logic behind them, as well the methods of managing them.
For our part, we've identified and sliced out a chunk of this proliferating area for investigation. What we've learned so far, and what we continue to learn is what we'll attempt to share with you from time to time. It can be a bit daunting, since many of those performing the research and writing about it have degrees in physics, mathematics, computer science, etc. And so a lot of what's written can be not only difficult to understand, but in many cases, practically not very useful. After all, if an allocation relies on the ongoing management skills of one with a knowledge of physics, math, and computer science, it's not going to help us mere mortals who lack the academic credentials.
As a result, our own efforts can be classified as closer to the common man or woman, rather than the rocket scientist. We'll attempt to communicate what we learn in that light.
Almost three months later, we're doing just that. It seems the original intent at succeeding "installments" was a bit ambitious - especially considering that we once - years ago - started what we thought would be a comprehensive look at asset allocation. That aborted effort began with good intentions, as did this one. Then, we were among those who were disturbed at how many people lost basically a ton of money in 2008-2009 who had asset allocations that were supposed to protect them from big losses.
The classic case would be the ubiquitous 60% stocks/40% bonds portfolio. People who held assets in this "conservative" allocation lost something in the area of 30%. Better than the 40% or more that people lost who held only stocks, but shocking nonetheless. Clearly 60/40 didn't protect your downside during the crisis. Bonds, which were supposed to provide balance and counter-weight to stocks did no such thing.
The bigger complaint came from erstwhile proponents of what is known as Modern Portfolio Theory. They too were slammed in ways they had not predicted or anticipated. Their so-called "efficient" portfolios were only efficient at losing money. And MPT couldn't seem to explain why. At first, we thought we'd join the hunt for an answer, but the pursuit became more involved than we had anticipated as we kept 1) discovering more and more about asset allocation that wasn't taught in formal training and education; 2) running out of time to both research and then write about what we were learning. And so our first stab went the route of many human ambitions: it died on the vine. But we did continue learning, even as we stopped writing about it.
And so we arrive, three months after this latest ambition energized us at the start of the New Year, at a decision. Rather than think of this as some comprehensive, never mind authoritative, exploration of how to allocate assets, we'll just share, from time to time, what we've learned and what we continue to learn. Ahh...that feels better: no promises, no over-ambitious commitment; frankly only a vague idea of where this will all lead. Will we find better ways than we currently have to allocate assets? Will any of these be applicable to you? Can we express these possibly better ways in simple language that might prove helpful to others? Only time will tell.
For today, we simply point out that the concept of "diversification" took on new life after 2008-2009.
Some retail investors, and a few more professionals, who were not diversified as they thought they were, woke up and spread out their money over more than just stocks and bonds. Others, noting that just about every asset class declined precipitously during the crisis, decided that even broad diversification wasn't enough. What was needed was some way to not only spread out, but to shift their money amongst asset classes in response to current and anticipated conditions in the markets and the economy. Add to this the reams of data now at our disposal and the increasingly robust and complex manner this data can be sorted and whole new categories of allocations were developed and continue to be developed for those able and willing to grasp the logic behind them, as well the methods of managing them.
For our part, we've identified and sliced out a chunk of this proliferating area for investigation. What we've learned so far, and what we continue to learn is what we'll attempt to share with you from time to time. It can be a bit daunting, since many of those performing the research and writing about it have degrees in physics, mathematics, computer science, etc. And so a lot of what's written can be not only difficult to understand, but in many cases, practically not very useful. After all, if an allocation relies on the ongoing management skills of one with a knowledge of physics, math, and computer science, it's not going to help us mere mortals who lack the academic credentials.
As a result, our own efforts can be classified as closer to the common man or woman, rather than the rocket scientist. We'll attempt to communicate what we learn in that light.
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