Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio

Chapter 3. Thinking in Cycles

As mentioned, the periodic table (see Table 3.1) of asset returns is a very effective tool commonly used for marketing asset-allocation services. By way of Table 3.1, potential investors are shown that the top and bottom asset-class performers vary from year to year. It is then commonly asserted that because the temporary deviations from historical patterns are random and unpredictable and because the whole process is mean-reverting—that is, ultimately, asset-class returns converge along their long-run historical averages—investors are better off using historical returns as well as the historical relationships among the variables as a guide to the future. The logical implication of this is that historical relationships, ...