JP Morgan: do yourself a favor, don't overthink this one

David_Snowball

An essay in yesterday's Financial Times argues in favor of radically simplifying one's strategic asset allocation. It argues, at base, that unusual assets produce unusual returns only until they are discovered by the hoi polloi and the industry arbitrages away the exceptional gain. As a result, the real money is made by first movers and the real costs are borne by those of us who try to get in later.

Here's the core:

On average, research shows around 100 per cent of their total returns can be ascribed to their choice of policy benchmark [i.e., their strategic asset allocation], along with around 90 per cent of their return volatility. The outcomes of those judgments are often complex.

Jan Loeys, JPMorgan’s veteran asset allocation guru, says in a recent client note that this complexity is both pointless and counterproductive. Pointless, because investors need only two assets: a global equity one and a local bond one, with the relative amounts driven by their ability to withstand short-term drawdowns and return needs. (Less is more when it comes to strategic asset allocation," FT.com, 10/17/2023)

The FT allows subscribers to share a limited number of articles with non-subscribers, so that link should work for folks who want to look at the argument but don't have an FT account.

David

WABAC

Better Loeys at the following link, which I got to from the article posted above.

https://www.ft.com/content/651cc7a4-27e3-4026-9381-76421a0203bb

Sven

Agree. That following article has additional details.

Interesting quote coming from JPM asset allocation expert.

The danger is that many of us tend to overrate our ability to call the market short term. It is our perception that the most successful investors over time tend to be the ones that base their decisions on what they can be quite confident about, which is generally the yield/value of an asset or asset class and its historical long-term relative performance. Hence, a “realistic” individual investor is in our mind probably best off sticking with long-term value-based allocation and to ignore the temptation to trade the market on short-term beliefs. The general perception that “retail” tends to buy high, after a market has rallied for some time, and sell low, after that asset class has gone through severe losses, would be consistent with many of us overrating our trading skills.

Essentially, he recommends holding passive funds/ ETFs as oppose with wide array of products that JPM sells.

Crash

A world of sense.... Never any short-term trading here. Although I have put some money into some real pigs--- until the lipstick wore off. Fooled me at the outset.

rforno

Yep. I would add, however, that the Big Guys (incl JPM) have access to macro/micro information and analytics that the average person does not, so they can easily be "first in" on something and either profit largely and/or be out of the trade before it hits the front page of BusinessWeek or CNBC starts covering it, at which point the second-wave of 'dumb money' rushes in and gets taken to the cleaners.

Secondly, the Big Guys (well, most of 'em) have no problem continuing to sell high-priced specialized, uber-complex products to anyone who wants to buy them in the quest for profits -- be they pension plans, 'accredited' investors, and sadly, increasingly, the average person .... who again may well be late to the game and as a result get their faces ripped off. (I wonder if Loey's actual reseearch piece addresses this or not - would be great to see it.)

But on the whole, I agree w/the premise of the article. Simpler and less-complex is usually better for everyone.

Sven

Loeys is avoiding government bond, high yield, and oversea (currency) bonds while he is okay with foreign stocks. Also he is avoiding commodity and tech sectors and they can be added when necessary. So there is some level of customization in his asset allocation as oppose to those allocation used in target date funds.

It would be interesting to back test his allocation for the past 10 years.

WABAC

Sven said:

It would be interesting to back test his allocation for the past 10 years.

I'm guessing it's a little more diversified than a global stock fund and local bond fund.

Sven

Agree. For institutional investing, the JPM guys are more likely to be diversified with low cost index products.

hank

A fascinating thought. I’ve gone from 20 to 10 holdings over the past year or two. So, “progress is being made” as they say.

golub1

If you buy Loeys theory which I'd like to do, which global equity fund would you buy? Which bond fund? I would be most interested in active ETf's because of cost and tax efficiency BINC is new but I like the idea of flexibility since I 'd like this to be long term buy and hold. I think there are one fund active solutions such as VANGUARD WELLINGTON GLOBAL EQUITY. PRWCX WHICH I OWN MIXED WITH A BOND FUND.