Strategic Asset Allocation:
Balancing Risk and Return
Many
theories regarding how to structure investment portfolios have been developed.
Most of them do not stand up in the light of experience. Modern Portfolio
Theory, the basis for Asset Allocation, is an exception. First developed by two
professors in the late 1950’s, and later refined by a third, Asset Allocation
has become the favored portfolio management technique of most major financial
institutions. An indication of the legitimacy of the process is that the three
professors shared the Nobel Prize for Economics in 1990.
Most
portfolios are put together using a ‘seat of the pants’ approach. Over time,
the results reflect this. Usually, the investor finds out that he or she has
assumed too much risk for the amount of return being realized from the
portfolio. Sometimes the investor has been so conservative that he or she could
have enjoyed much higher returns by assuming only slightly greater risk. Other
common problems are that the portfolio is either concentrated too heavily in too
few assets or is over diversified. While Asset Allocation is not perfect, and
does not assure against market loss, it is designed to help overcome most of these problems. We call our fee based program
managing no-load mutual funds and other low cost
investment alternatives "The Financial
Manager".
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