Asset Allocation, Hoaxes, and the Creation of Straw Men

Singer, Brian D.
October 1997
Journal of Financial Planning;Oct97, Vol. 10 Issue 5, p14
Academic Journal
The article focuses on the concept and problems of asset allocation. Asset allocation receives widespread attention among investors. There is little doubt that asset allocation is an important determinant of portfolio performance. Only if expected returns are fixed should asset allocation weights be fixed. In fact, investment opportunities change over time, both absolutely and relatively. The design of a portfolio involves at least four steps: deciding which asset classes to include and which to exclude from the portfolio; deciding upon the normal policy, or long-term, weights for each of the asset classes allowed in the portfolio; strategically altering the investment mix weights away from normal in an attempt to capture excess returns from important fluctuations in asset class prices (market timing); selecting individual securities within an asset class to achieve superior returns relative to that asset class (security selection). Asset allocation policy should be determined by long-term, forward looking, equilibrium, asset class return and risk characteristics considered in conjunction with the objectives and constraints of the investor. However, asset class returns and risks periodically deviate from the long-term forward looking characteristics by sufficient magnitude to warrant strategically altering the investment mix. Altering the investment mix in response to important asset price fluctuations is an integral aspect of the design of an actively managed portfolio.


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