Taming the Beast: Wall Street's Imperfect Answers to Making Money

Summary

• Diversification of assets, combining those that zig with others that zag, has become a standard of financial planning. But this core of asset allocation didn’t seem to work in the 2008–2009 market collapse, when almost everything but Treasuries lost.
• Since a key tenet of asset allocation is finding things that don’t correlate, investors are always looking for what doesn’t track stocks, which are the engine of any portfolio. This is hard to do. During downturns, even outliers like commodities tend to move more like stocks.
• Economist Harry Markowitz provided the framework for diversification in the early 1950s by inventing Modern Portfolio Theory (MPT), a statistical method of assembling a portfolio that balances risks and returns, with a stress on assets that don’t move in tandem. But MPT is based on statistical norms, and the theory took a beating from the 2008–2009 madness, which battered pretty much everything.
• Bonds, particularly Treasuries, don’t correlate well with stocks. Hard assets like energy, timber, and gold usually don’t track either stocks or bonds. Real estate used to be a steady riser until the late 2000s, and may be again.
• Conservative allocations are bond heavy and stock light, but may not build the wealth needed for a good retirement. Aggressive portfolios, tilted toward stocks, may blow up in bad times. An even split might work better over the long pull. Investors should rebalance their portfolios at best twice a year to make sure they haven’t strayed from ...