Consistent Asset Allocation

Jacobsen, Brian J.
November 2010
Journal of Financial Planning;Nov2010, Vol. 23 Issue 11, p50
Academic Journal
Investors may have different levels of willingness and ability to adjust portfolio allocations. Some may want to "set it and forget it" while others concern themselves with daily changes in stock and bond prices. Additionally, investors may have differing opinions about where the markets are headed. This paper outlines how to make sure investment horizons and opinions are consistently combined into an asset allocation using simple concepts from modern portfolio theory. Modern portfolio theory (MPT) defines the distribution of outcomes, not the paths that are taken to get to those outcomes. An alternative way to visualize efficient portfolios is to think of them as different probability distributions from which an investor can select. The inputs into the asset allocation decision framework should be consistent with the client's willingness and ability to adjust his or her holdings. One method of generating inputs for MPT is to draw your sample of returns from periods of time that look similar to the present situation. Another method of forecasting returns uses key historical economic and financial data to develop a small-scale macroeconomic model of future returns.


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