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How much does Asset Allocation strategies matter?

A large portion of the returns (near 90%) stems from which asset class and how much you allocate to them.

A small portion (10%) is the individual issues.

Which is why they say get your asset allocation wrong, unbalanced and you will have an issue.

But there are so many kinds of asset allocation out there and experts are touting that theirs are the most sound.

Mebane Faber tries to make sense of it. On this post here, he sought to consolidate all the allocation by experts, academics, university endowment funds in one post.

These are all age old asset allocation strategies through a period of high inflation and then lower inflation but sustain growth follow by a secular bear market.

This is his result:

(click image to blow it up)

It looks to me that different strategies the biggest  difference is the standard deviation and Sharpe ratio. These are measurements of fluctuations from the mean.

The Permanent Portfolio and Risk Parity portfolio looks splendid in that their max portfolio draw down was 12-14%!

But I wonder how well the Risk Parity will do in a rising interest rate environment (we have 30 years of falling interest rates which is good for a bond heavy portfolio like the Risk Parity portfolio)

End of the day, all portfolios achieve good capital growth (CAGR). 100 bucks become substantial eventually.

So where does that leave us? Essentially, if a standard allocation that stood the test of time tends to revert to the mean, then what matters is more on things the investor can control.

In this case they are classified into 2 areas

  • Keeping the overall cost in check. What will reduce the CAGR of these returns are the expense  cost, management fees, commissions, trading fees
  • Behavioral / Psychological aspect of investing. There will be much pessimistic times and euphoric times, and you are likely to do illogical thing to your portfolio. You would want to manage it well (its harder than one bullet point btw)


The ingredients (assets) that goes into wealth building have not changed much. Focus on what you can control rather  than those that you cannot.

Here are additional articles that are interesting on the subject:

  • Tracking the Lazy Portfolios

If you like articles like this you can go over to my resources section where I collect all these best ideas that I written in the  past [Resources]


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Ser Jing

Saturday 28th of September 2013

Seems that pension plan capital allocators should all take a leaf from Washington Post's handling of their pensions. This 1975-dated memo from Warren Buffett to Katherine Graham (then the CEO of WaPo) could be said to have saved WaPo's pension plans.

When Jeff Bezos bought over the paper, the company had excess pension plan assets of US$1b more, even as other companies were struggling.

Buffett's memo's strategy was very sound.

Pension plan allocation (analogous to a young man/woman allocating capital in preparation for retirement) is for the very long-term. This gives equities the best chance to come out way ahead of all other assets. The kicker comes when Buffett advised Graham to view investing in equities for WaPo's pension plan with the exact same careful methodology and mindset when evaluating other companies for acquisition. In essence, think of stock investing as buying over businesses. The end result's a fantastic pension plan for WaPo.

That's some food for thought, isn't it.

The memo's found here:

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