The New Science of Asset Allocation: Risk Management in a Multi-Asset World

Preface

Without reservation, everything we believe about asset allocation and the perceived science surrounding its application is not necessarily true. The corollary to this statement is that a complete understanding of asset allocation is impossible. First, all beliefs are based on perceived fact; unfortunately sometimes those perceptions stem from a misreading or misunderstanding of the relevant material, or on the reliance of oral communications from a trusted advisor or source. Often our beliefs are a function of intellectual laziness or a failure to properly question.

Second, we do not even know all the facts associated with any asset investment. What is known is that the market disturbances of 2007 and 2008 have brought into sharp relief the failure of past beliefs—and the facts upon which they rest—relating to financial models, the institutions that create and distribute these models, and the regulatory and legislative oversight designed to protect investors as well as the financial system as a whole. As such, this is a seminal period in asset allocation. It is a period where once again the approach to asset allocation and risk management has an opportunity to be re-examined and where a new appreciation of the changing nature of asset allocation approaches and the importance of discretion in creating and managing the preservation of wealth can be established.

Asset allocation is perhaps the only investment tool that provides investors with an inherent “free lunch.” It ...