To this point we have covered the conceptual framework for constructing a balanced asset allocation. In this chapter we roll up our sleeves and dive into a simple methodology for actually creating a balanced portfolio.
The Logical Sequence behind Efficiently Weighting Asset Classes
There are two decisions you must make to create a balanced portfolio. First, you must determine which asset classes to include. This decision will be based on identifying the economic biases of various asset classes. The mix should include a variety that covers all the major potential economic outcomes: rising growth, falling growth, rising inflation, and falling inflation. Much of the book thus far has been dedicated to this topic.
After you have established which asset classes are appropriate for your portfolio, the second decision will be how much to allocate to each. An understanding of the volatility of each asset class will be an important factor in this decision. The goal of this chapter is to provide a step-by-step process to help you determine the right allocation to each asset class.
The Ideal Portfolio for Each Economic Climate
The overall goal is to build a portfolio that is by and large indifferent to shifts in the economic environment. A helpful way to construct such an allocation is to first build the ideal portfolio for each economic climate. What is the best allocation for a rising growth environment? What is the ...