Exploring Asset Allocation E-Book

Terence Grennon

• Herausgeber: BookRix
• Kategorie: Fachliteratur
• Sprache: Englisch

Veröffentlichungsjahr: 2023

Beschreibung

During the financial crisis of 2008–2009, I worked as a co-portfolio manager, overseeing thirty billion dollars' worth of assets belonging to asset allocation funds. My experience as a professional investor taught me that I had a responsibility to my customers to do a better job of preventing the loss of their assets, and this was one of the most important lessons I took away from my career. It was unacceptable for a custodian to suffer a loss of 15–45 percent while the market as a whole suffered a loss of 60–75 percent.

Leseprobe

Terence Grennon

Exploring Asset Allocation

Analysis & Guidance

While every precaution has been taken in the preparation of this book, the publisher assumes no responsibility for errors or omissions, or for damages resulting from the use of the information contained herein. Exploring Asset Allocation First edition. March 23, 2023. Copyright © 2023 Terence Grennon. Written by Terence Grennon. BookRix GmbH & Co. KG81371 Munich

Introduction

If you are an investor like a lot of other people, then you have likely experienced at least one severe economic downturn in your lifetime. As Director of Asset Allocation at a company that was responsible for the asset allocation guidance of 6,000 registered representatives, I worked through the bear market that occurred between 2000 and 2002.

During the financial crisis of 2008–2009, I worked as a co-portfolio manager, overseeing thirty billion dollars' worth of assets belonging to asset allocation funds. My experience as a professional investor taught me that I had a responsibility to my customers to do a better job of preventing the loss of their assets, and this was one of the most important lessons I took away from my career. It was unacceptable for a custodian to suffer a loss of 15–45 percent while the market as a whole suffered a loss of 60–75 percent.

When I first began developing an alternative strategy for asset distribution, one of the first things I discovered was how important it is to safeguard against a 15% loss.

I was aware that protecting oneself against substantial loss would, over the course of time, result in a more significant increase in one's wealth. I also discovered that a plan for identifying a period of potential loss could be identified, and that a strategy for mitigating loss could be readily put into action. This was another important thing that I discovered. In the end, I came up with a method that, in comparison to a buy-and-hold strategy, generates a substantial amount of additional asset growth.

My interest in active asset allocation was sparked by the market downturns that occurred twice over the course of my investing career.

We are familiar with the theory behind asset allocation, but we all know that practice is very different when the market is in a panic.

This book summarizes the most significant findings from research conducted over the past half-century on topics such as investing during bull and bear markets, asset allocation, and investment administration.

We begin by taking a critical look at asset allocation and diversification; we then provide an in-depth analysis of investing in stocks; we then provide details on an active asset allocation approach.

Note: This eBook is a guide and serves as a first guide. In addition, please get expert advice.

Diversification

It is necessary to begin by familiarizing oneself with The Uniform Prudent Investor Act (UPIA), which is a component of the Restatement (Third) of Trusts. Doing so will enable one to comprehend the fundamental significance of diversification.

The UPIA establishes a collection of guidelines for the investment of trust assets. It communicates that very clearly.

"When it comes to diversifying a trust's investment portfolio, one of the most important factors to consider is having the appropriate asset distribution." The decisions that are made regarding asset allocation are an essential component of an investment strategy. They mark the beginning of the process of coming up with a strategy for diversification (and also serve as an expression of judgements regarding appropriate risk-return objectives).

Even though UPIA is not yet a rule, the majority of states have signed on to support it. The following phrasing should be the focus of your attention:

"the prudent move in minimizing the potential for significant losses is to spread the investments out across a number of different types of investments." The workable answer for board members and trustees has been to employ "diversified" models and techniques throughout the entire process.

This is also the case with 401(k) plans; a plan sponsor fiduciary is required to provide participants with an investment menu that provides the participant with a means to construct what is known as a "diversified" investment portfolio.

According to the Department of Labor, the fiduciary "must behave prudently and must diversify the plan's investments to minimize the danger of large losses."

This prerequisite is what constitutes the definition of diversification, which is when "gains in one investment will cancel out the losses in another." The solution has been for the financial services industry to use Modern Portfolio Theory (MPT) to develop and make accessible diversified asset allocation strategies for participants to use in order to manage their plan assets. This has been the approach that has been taken.

Target-date funds have traditionally served as the industry standard for retirement plan providers as an all-in-one MPT strategy.

The Modern Portfolio Theory (MPT) was founded on Harry Markowitz's paper entitled "Portfolio Selection," which he wrote in 1952. In 1990, the MPT was awarded the Nobel Prize in Economics for its author. The MPT strategy is a model for optimization that takes into account the returns, risks, and correlation coefficients associated with each asset class. This information is then used to develop diversified strategies that are intended to maximize the portfolio's unit of return for each unit of risk.

Since the middle of the 1990s, the MPT model has been widely used across the entire financial services industry, and it is still used in the services that are provided for financial planning today.