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All About Asset Allocation, Second Edition Paperback – June 21, 2010
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About the Author
Richard A. Ferri, CFA, is president and senior portfolio manager of Portfolio Solutions, LLC, and an adjunct professor of finance at Walsh College in Michigan. He is the author of Protecting Your Wealth in Good Times and Bad, All About Index Funds, and Serious Money: Straight Talk About Investing for Retirement. Ferri is regularly quoted in the media including the Wall Street Journal, Barrons, Businessweek, and Forbes. He has appeared on many financial radio shows and television programs and is a frequent speaker at advisor industry events.
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Top customer reviews
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"Gary Brinson's 1986 famous study can be defined as the birth of asset allocation. He found that over 90% of a portfolio's return can be determined by the asset classes used, not what the individual investments were. Brinson's findings have been relatively slow to flow through the investment community and to individual investors."
This is 100% absolutely WRONG!!!!! Brinson's study did NOT measure portfolio return performance! Whenever I see the Brinson study manipulated into schlock like this it raises the hair on the back of my neck.... Brinson's study measured the VARIABILITY of the "actual portfolio returns vs. the portfolio's benchmark index composition returns"... and it only dealt with large institutional portfolios... which means that the study is really about 95% irrelavant to most individual investors...
If you really want to read what the study actually said, and read about the critics of the study (there are many) - publish.uwo.ca/~jnuttall/asset.html
Portfolio performance attribution puts the asset allocation model as delivering between 40-65% of the portfolio's return - depending on whose model or study you use....
That means that 35% - 60% of your return is determined by timing and security selection - ACTIVE management!!!!
Anyone who tells you that the Brinson study determined the amount of performance dictated by the asset alocation policy never read the Brinson study!
Asset allocaton is about diversifying risks - not assets... That means you pay attention to return correlations.... and don't forget to differentiate between asset classes and "SUB" asset classes..... Small cap, mid cap, and large cap (and even breaking those into value and growth) are all SUB classes of ONE asset class - equities!
Investments boil down to risk versus the expected reward. Generally, for credible investment vehicles, for a greater return (reward), one must expect greater volatility and instability (Real definition of risk.). If the timing in one's life is inconvenient, one can find themselves having to liquidate a very volatile investment at the worst possible moment; i.e. 12/08. Asset allocation is a plan to spread one's portfolio over a spectrum of investment vehicles to greatly reduce the risk, yet still reap most of the rewards. NOTE: risk is 'not' the probability that one might lose money.
Now, there are 3 critical premises to this concept that must be understood. These premises also shape the 'dual' nature of my review. These premises also severely shape the success of this entire concept. (1) The model was developed by grad students as a research project. By definition they had to make very simplistic assumptions, to limit the scope of their project, and to get a manageable result. That means the financial world is far more complex in reality. (2) One big assumption is that one can not do any better than the long term return of the S&P500. Every broker, financial planner, and investment book presents that as the standard. It is not true. It is merely simplistic. Actually for financial planners it is pure criminal laziness. (3) Asset allocation in its present form, assumes that the investor will not read, comprehend, or adjust to any economic events or news, during their entire investment life. For example, learning that the US economy was built on a house of financial instrument cards and that there is little to no wealth building enterprises left in this country; apparently means nothing to the average investor. Therefore, he/she will continue to maintain a 70% allocation in large cap US stocks, even while 2 major automakers file for bankruptcy.
Now my review. It turns out that most investors actually operate on premise number 3 above. Secondly most investors confuse the probability that they might lose money with the definition of risk. Thus, they invariably react exactly the opposite of their best interests in both great times and disaster. Most investors do not have the inclination to spend much time at all, if any, understanding how investments work, wealth is built, or calculating what their needs are or will be. For this kind of investor, asset allocation, even in its simplistic popular form, will work very well for them. This book is written at a technical level that is perfect for the average investor who wants to put away a sizable nest egg for their future. The allocation models, advice, and discussions, within this book, will work adequately over the long term for the above class of investor. So I highly recommend this book on that basis.
Then there are the relative minority of investors who actively become involved in their portfolios. For a person who reads, comprehends, and is able to modestly predict the consequences of major geopolitical and economic events, contemporary asset allocation is severely flawed. Following the suggestions in this book, or any other on this topic that I have read, will doom the reader to mediocre returns and dozens of missed opportunities over a life time. I predict that a person will end up with a fraction of the total accumulation of wealth that is available, by simply 'not' keeping abreast of current events. i.e. In 2008, when it was apparent that the US economy was built on a house of cards, simply reallocating a sizable chunk of one's portfolio to documented and proven strong economies (BRIC: Brazil, Russia, India, China) would have avoided sizable losses and replaced them with dramatic gains. And, it did not take rocket science for a lay person to understand that. Or, a stimulus plan that simply prints worthless paper money, to be spent on government workers bonuses and salaries, is not going to lead to a long term robust wealth building economy.
My second and negative opinion having been stated, I would still recommend this book, Edelman's "Lies about money", or other readable books on the topic. The basic concept is not a waste of time. If one understands the limitations of the premises that were made during asset allocation's conception, there is still a great deal of value to be gleaned from the idea. This book is quite readable, especially to a non-technical person. So, combining the simplistic concepts with some reason and basic common sense in today's world, I believe an investor can still extract a wealth of understanding from this book. And, that person can profit from that allocation knowledge.
Therefore 4 stars overall, 3 for the experience investor, 5 for the majority.
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Then include: Swedroe, Bernstein, Bogle, Larimore, Buffet. Get them.Read more