Adaptive Asset Allocation E-Book

Adam Butler

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 289

Veröffentlichungsjahr: 2016

Beschreibung

Build an agile, responsive portfolio with a new approach to global asset allocation Adaptive Asset Allocation is a no-nonsense how-to guide for dynamic portfolio management. Written by the team behind Gestaltu.com, this book walks you through a uniquely objective and unbiased investment philosophy and provides clear guidelines for execution. From foundational concepts and timing to forecasting and portfolio optimization, this book shares insightful perspective on portfolio adaptation that can improve any investment strategy. Accessible explanations of both classical and contemporary research support the methodologies presented, bolstered by the authors' own capstone case study showing the direct impact of this approach on the individual investor. Financial advisors are competing in an increasingly commoditized environment, with the added burden of two substantial bear markets in the last 15 years. This book presents a framework that addresses the major challenges both advisors and investors face, emphasizing the importance of an agile, globally-diversified portfolio. * Drill down to the most important concepts in wealth management * Optimize portfolio performance with careful timing of savings and withdrawals * Forecast returns 80% more accurately than assuming long-term averages * Adopt an investment framework for stability, growth, and maximum income An optimized portfolio must be structured in a way that allows quick response to changes in asset class risks and relationships, and the flexibility to continually adapt to market changes. To execute such an ambitious strategy, it is essential to have a strong grasp of foundational wealth management concepts, a reliable system of forecasting, and a clear understanding of the merits of individual investment methods. Adaptive Asset Allocation provides critical background information alongside a streamlined framework for improving portfolio performance.

Leseprobe

Table of Contents

Title Page

Copyright

Dedication

Acknowledgments

Part I: The Philosophy of Successful Investing

Chapter 1: The Most Important Concepts in Wealth Management

Chapter 2: The Narrative Is Reality

Chapter 3: Tightly Grouped Arrows Nowhere Near the Bull's-eye

Chapter 4: What Is Gestalt?

Chapter 5: Measuring the Relative Value of Portfolios

Chapter 6: The Whole Is Greater than the Sum of Its Parts

Chapter 7: Our Process Is a Financial Gestalt

Part II: Saving and Withdrawing from Portfolios

Chapter 8: Beware of Those Pesky “Volatility Gremlins”

Chapter 9: It's Not Just the Destination, It's Also the Journey

Chapter 10: In a Perfect World

Chapter 11: Home on the Range

Chapter 12: Timing Is Everything

Chapter 13: Longevity Risk

Chapter 14: Plan for the Worst, Hope for the Best

Chapter 15: Sequence of Returns for Savers

Chapter 16: Individual Rate of Return for Savers

Chapter 17: Sequence of Returns for Retirees

Chapter 18: Do You Feel Lucky?

Part III: Current High Valuations Mean Lower Future Returns

Chapter 19: A Simple Model to Forecast Equity Market Returns

Chapter 20: Implied Future Returns over the Next 20 Years

Chapter 21: How Do We Do It?

Chapter 22: Forecasts 80 Percent More Accurate than Always Assuming Long-Term Averages

Chapter 23: Roller Coasters Are for Amusement Parks

Chapter 24: The Last Five Years Have Been a Triumph for the Ostriches

Part IV: An Investment Framework for Stability, Growth, and Maximum Income

Chapter 25: A Word about Asset Allocation

Chapter 26: The Optimization Machine

Chapter 27: Garbage In, Garbage Out

Volatility

Correlations

Returns

The Flaw of Averages

Chapter 28: All We Know Is That We Know Nothing

Chapter 29: If We Know How Assets Should Behave

The Permanent Portfolio: Structural Diversification's Poster Boy

Japan as a Deflationary Case Study

Chapter 30: A Structurally Diverse Investment Universe

Chapter 31: If We Can Estimate Volatility

Chapter 32: If We Can Estimate Volatility and Correlation

Chapter 33: If We Can Estimate Volatility, Correlations, and Returns

Chapter 34: Summary of the Optimization Machine

Chapter 35: Building to Adaptive Asset Allocation

Chapter 36: Integration of Adaptive Asset Allocation

The Next Generation of Portfolio Management

Part V: Why You Should Trust the Research

Chapter 37: The Usefulness and Uselessness of Backtests

Degrees of Freedom

Sample Size

Multiple Discovery

Structural Impediments to Asset Class Arbitrage

On the Robustness of Adaptive Asset Allocation

Chapter 38: Tactical Alpha and the Quantitative Case for Active Asset Allocation

Shoulders of Giants

Structure

Part One: Theory

Part Two: Empirical Analysis

Conclusion

Chapter 39: Sensitivity of Safe Withdrawal Rates to Longevity, Market, and Failure Risk Preferences with Implications for Asset Allocation

Safe Withdrawal Rates

Aftcasting

The Four Levers of Retirement

Pulling on the Levers

But I Won't Need as Much Income When I'm Old

Conditional Safe Withdrawal Rates

Summary

Chapter 40: Winning by Not Losing. Or, Bootstrapping to Estimate Risk

Final Thoughts

Bibliography

Index

End User License Agreement

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Guide

Cover

Table of Contents

Begin Reading

List of Illustrations

Chapter 5: Measuring the Relative Value of Portfolios

Figure 5.1 The Efficient Frontier (Solid Line) and Capital Market Line (Dotted Line)

Chapter 11: Home on the Range

Figure 11.1 Range of Potential Outcomes for Savers

Figure 11.2 Range of Potential Outcomes for Retirees

Chapter 12: Timing Is Everything

Figure 12.1 Range of Total Nominal Returns to S&P 500 (Solid Lines) and Balanced Portfolios (Dotted Lines), 1900–2014

Figure 12.2 S&P 500 Realized 20-Year Rolling Total Returns

Chapter 14: Plan for the Worst, Hope for the Best

Figure 14.1 Dow Jones Industrial Average Index (1966–1997)

Figure 14.2 Dow Jones Industrial Average Index (1966–1981)

Figure 14.3 Dow Jones Industrial Average Index (1982–1997)

Chapter 15: Sequence of Returns for Savers

Figure 15.1 Aggregate Cash Savings Example

Figure 15.2 Retirement Wealth Trajectory: Poor Early Returns and Strong Late Returns

Figure 15.3 Retirement Wealth Trajectory: Strong Early Returns and Poor Late Returns

Chapter 16: Individual Rate of Return for Savers

Figure 16.1 Early Returns versus Late Returns

Chapter 17: Sequence of Returns for Retirees

Figure 17.1 Retirement Wealth Trajectory: Weak Early Returns and Strong Late Returns

Figure 17.2 Retirement Wealth Trajectory: Strong Early Returns and Weak Late Returns

Figure 17.3 Early Returns versus Late Returns

Chapter 19: A Simple Model to Forecast Equity Market Returns

Figure 19.1 Corporate Profits after Tax as a Percentage of GDP (Solid Line, Left Axis) and Actual Future Four-Year Change in Corporate Profits (Dotted Line, Right Axis)

Chapter 21: How Do We Do It?

Figure 21.1 15-Year Forecast Returns versus 15-Year Actual Future Returns

Chapter 27: Garbage In, Garbage Out

Figure 27.1 60-day Volatility Ranges for Select Asset Classes

Figure 27.2 Portfolio Volatility of a 50/50 Stock/Bond Portfolio

Figure 27.3 Rolling 250-Day Stock–Bond Correlation

Figure 27.4 Rolling 250-Day Stock–Gold Correlation

Chapter 28: All We Know Is That We Know Nothing

Figure 28.1 Equal Weigh Portfolio Risk Contributions

Chapter 29: If We Know How Assets Should Behave

Figure 29.1 Four Economic Regimes

Figure 29.2 Relevant Assets by Inflation and Growth Regime

Figure 29.3 U.S. Total Stock Market

Figure 29.4 60/40 Stocks/Treasuries

Figure 29.5 Simplified Permanent Portfolio (Equal Weight stocks, gold, Treasuries, cash), 1995–2012

Figure 29.6 Nikkei Total Return, 1992–2013

Figure 29.7 Simple Permanent Portfolio Japan

Figure 29.8 Nikkei and Simple Permanent Portfolio Japan

Chapter 31: If We Can Estimate Volatility

Figure 31.1 Naïve Risk Parity Portfolio Risk Contributions

Figure 31.2 S&P 500 Index (Dotted Line) versus S&P 500 Volatility-Sized Returns (Solid Line), 1990–2014

Chapter 32: If We Can Estimate Volatility and Correlation

Figure 32.1 Robust Risk Parity: ERC Risk Contribution Weights

Chapter 33: If We Can Estimate Volatility, Correlations, and Returns

Figure 33.1 Momentum Portfolio Comparison

Chapter 35: Building to Adaptive Asset Allocation

Figure 35.1 U.S. Total Stock Market

Figure 35.2 10 Assets, Equal Weight, Rebalanced Monthly

Figure 35.3 10 Assets, Naïve Risk Parity, 15% Volatility Target, Rebalanced Monthly

Figure 35.4 10 Assets, Robust Risk Parity, Minimum Variance Method

Figure 35.5 Top Half Momentum Portfolio, Equal Weighted, Rebalanced Monthly

Figure 35.6 Top Half Momentum Portfolio, Naïve Risk Parity, Rebalanced Monthly

Figure 35.7 Top Half Momentum Portfolio, Robust Risk Parity, Minimum Variance Method, Rebalanced Monthly

Chapter 36: Integration of Adaptive Asset Allocation

Figure 36.1 Adaptive Asset Allocation, Rebalanced Weekly, 8% Target Volatility

Figure 36.2 Growth of $1, Adaptive Asset Allocation (Solid Black Line), S&P 500, 60/40 Balanced Portfolio

Figure 36.3 Drawdowns, Adaptive Asset Allocation (Solid Black Line), S&P 500, 60/40 Balanced Portfolio

Chapter 37: The Usefulness and Uselessness of Backtests

Figure 37.1 Probability Alpha Manager Outperforms Beta Manager over 1 to 20 Years

Figure 37.2 90 percent Range of Log Cumulative Relative Returns between Manager A and Manager B at Various Horizons

Chapter 38: Tactical Alpha and the Quantitative Case for Active Asset Allocation

Figure 38.1 Average Pairwise 252-Day Rolling Correlations for S&P 500 Stocks and for S&P 500 vs. U.S. Treasuries

Figure 38.2 Factor Variances for Dow 30 Stocks Derived from 500-day Correlation Matrix through June 30, 2014

Figure 38.3 Principal Portfolio Loadings Heat Map for Dow 30 Stocks Derived from 500-Day Correlation Matrix through June 30, 2014

Figure 38.4 Proportion of Total Portfolio Breadth Attributable to Each Level of Grouping

Figure 38.5 Proportion of Standardized Variance Attributable to Tactical Alpha Decisions at Various Correlations

Figure 38.6 Number of Effective Bets Obtained from Dow Jones 30 stocks vs. Random Matrices of Similar Dimension

Figure 38.7 Comparison of the Number of Effective Bets Obtained from Random Matrices

Figure 38.8 Evolution of the Proportional Attribution of the Breadth Term in Grinold's Fundamental Law of Asset Management Related to Asset Allocation vs. Security Selection

Figure 38.9(a) Rolling 1-Year Average Information Ratio for Investor 1

Figure 38.9(b) Rolling 1-Year Average Information Ratio for Investor 2

Figure 38.9(c) Rolling 1-Year Average Information Ratio for Investor 3

Chapter 39: Sensitivity of Safe Withdrawal Rates to Longevity, Market, and Failure Risk Preferences with Implications for Asset Allocation

Figure 39.1 Aftcast for 6 percent Withdrawal Rate, 60/40 Stock/Bond Asset Allocation, 21.2 Year Horizon

Figure 39.2 Probability of Dying, Female Age 65

Figure 39.3 Percentage of Successful Outcomes over 20-Year Rolling Horizons: Asset Allocation (Top Axis) vs. Withdrawal Rates (Left Axis)

Figure 39.4 Sensitivity of Successful Retirement Outcomes to Percentile of Remaining Lifespan versus Retirement Age (Assumes Female Life Table, 70 percent Stocks/30 percent Bonds, and 5 percent Withdrawal Rate)

Figure 39.5 Percentage of Successful Outcomes over 20-Year Horizon

with 1 Percentage Point Decrease in Withdrawal after 10 Years

: Asset Allocation (Top Axis) versus Withdrawal Rates (Left Axis)

Figure 39.6 Sensitivity of Successful Retirement Outcomes to Percentile of Remaining Lifespan (Top Axis) versus Retirement Age

with 1 Percentage Point Decrease in Withdrawal after 10 Years

Figure 39.7 Optimal Withdrawal Rate with Perfect Foresight, 360-Month Retirement Horizon

Figure 39.8 Derived Optimal Withdrawal Rate vs. Multiple Regression Estimate from Contemporaneous Earnings Yield and Interest Rate

Figure 39.9 The Black Region Is the 95th Percentile Range of Forecasts at Each Month Based on the Regression. The Grey Line Is the Ex-ante SWR.

List of Tables

Chapter 12: Timing Is Everything

Table 12.1 Range of Total Nominal Returns to S&P 500 & Balanced Portfolios, 1900–2014

Chapter 16: Individual Rate of Return for Savers

Table 16.1 Comparing Individual Rates of Return (IRR%)

Chapter 17: Sequence of Returns for Retirees

Table 17.1 Comparing Individual Rates of Return (IRR%)

Chapter 20: Implied Future Returns over the Next 20 Years

Table 20.1 Factor Based Return Forecasts Over Important Investment Horizons as of End of October 2014

Chapter 21: How Do We Do It?

Table 21.1 Explanatory Power of Valuation Metrics for Estimating Short-Term Future Returns

Table 21.2 Explanatory Power of Valuation Metrics for Estimating Long-Term Future Returns

Table 21.3 Modeled Forecast Future Returns Using Current Valuations

Chapter 22: Forecasts 80 Percent More Accurate than Always Assuming Long-Term Averages

Table 22.1 Comparing Long-Term Average Forecasts with Model Forecasts

Chapter 34: Summary of the Optimization Machine

Table 34.1 Taxonomy of Portfolio Optimization

Chapter 38: Tactical Alpha and the Quantitative Case for Active Asset Allocation

Table 38.1 Proportion of Total Return Explained by Policy Portfolio

Table 38.2 Asset-Class Universe

Table 38.3 Information Ratios of Three Simulated Investors

Chapter 39: Sensitivity of Safe Withdrawal Rates to Longevity, Market, and Failure Risk Preferences with Implications for Asset Allocation

Table 39.1 ANOVA Regression Output

Adaptive Asset Allocation

Dynamic Global Portfolios to Profit in Good Times—and Bad

ADAM BUTLERMICHAEL PHILBRICKRODRIGO GORDILLO

Copyright © 2016 by Adam Butler, Rodrigo Gordillo, and Michael Philbrick. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data

Names: Butler, Adam, 1975– author. | Gordillo, Rodrigo, 1980– author. | Philbrick, Michael, 1967– author.

Title: Adaptive asset allocation : dynamic global portfolios to profit in good times—and bad / Adam Butler, Rodrigo Gordillo, Michael Philbrick.

Description: Hoboken, New Jersey : John Wiley & Sons, Inc., 2016. | Includes bibliographical references and index.

Identifiers: LCCN 2015039980 | ISBN 9781119220350 (cloth) | ISBN 9781119220398 (ePDF) | ISBN 9781119220374 (ePub)

Subjects: LCSH: Portfolio management. | Investments.

Classification: LCC HG4529.5 .B87 2016 | DDC 332.6—dc23 LC record available at http://lccn.loc.gov/2015039980

Cover Design: Wiley

Cover Image: Earth dropping into water, courtesy of the authors