Hi Guys,
A few days ago a distinguished MFOer didn’t understand the logic of an asset allocation plan with an equally weighted partition of its components. The logic might be missing in action but that rather mundane asset allocation has been a part of investing since biblical times. Sometimes it is motivated by an investor without knowledge or preferences; at other times an equal allocation is championed by giants within the industry.
In the Talmud, within the discussion sections pertaining to Jewish customs and history, it is recommended that “Let every man divide his money into three parts, and invest a third in land, a third in business, and let him keep a third in reserve”. Conservative investing wisdom has a long history.
In the last few centuries, the Rothschild’s asset allocation plan was to invest their wealth in three equally weighted parts: securities, real estate, and art. It’s reported that the family did reasonably well.
Today, some portfolios might simply contain equal parts of a total bond index and a total equities index from Vanguard to minimize cost drag and to minimize investment research time commitment. That approach will likely never be a barn burner, but it will often deliver returns in the top quartile of annual rankings.
Another excellent example of an equal allocation policy within the mutual fund industry is the Permanent Portfolio. Initially, the Permanent Portfolio distributed holdings within 4 categories when originally assembled by Harry Browne in 1982. The current management has expanded that mandate to about 6 investment classes today.
Overweighting investment categories can be a hazardous business. Behavioral research finds that we all are mistake prone. Investor performance shortfalls are well documented by numerous academic and industry studies. We frequently fall victim to fast response behavioral pressures that are reflexive driven rather than to invest more slowly, more reflectively.
Daniel Kahneman spent a lifetime studying this human characteristic, and summarized his findings in his classic book "Thinking Fast and Slow”. The lessons documented in that book can guide investors to improve risk control and to avoid big mistakes.
However, that superior book is over 400 pages long, and, although it is a fast read, some investors will choose not to commit the required time for a complete reading. Fortunately, excellent article length substitutes do exist. Here is a Link to one written by Jim O'Shaughnessy of “What Works on Wall Street” fame:
http://jimoshaughnessy.tumblr.com/post/96471085029/behavioral-economics-why-we-know-what-isnt-soThe Link directs you to the first part of a four part series. After reading the first installment, simply click on the “Next Post” box at the bottom of the work to gain access to the next part of this 4-part behavioral piece. Please enjoy.
Earlier I mentioned the Rothschield family to illustrate an equal asset allocation philosophy. In reality that family was quite complex and possessed almost limitless power, especially in Europe. But Baron Nathan Rothschild produced a huge body of simple, quotable investment wisdom. Perhaps his most famous is “ Buy when blood is running in the streets”.
But my favorite Rothschield quote is “ It requires a great deal of boldness and a great deal of caution to make a large fortune, and, when you have it, you require ten times as much wit to keep it”. This quote captures the competing attributes necessary to be a successful investor: boldness, caution, and wit. That’s a challenging trifecta that few investors own.
Better recognizing our Behavioral shortcomings should enhance the odds for investment success.
Your comments are always welcomed.
Best Regards.
