A new approach to asset allocation is needed
If a more diversified, less equity-centric approach would have generated a 4.5% return over the 60/40 stock/bond portfolio during the Naughts, what about the future? Yesterday’s asset allocation will not work for tomorrow-- past is not prologue. Risk premiums fluctuate, sometimes wildly. Yet many investors maintain a relatively constant risk tolerance, similar to their 60/40 policy portfolio.
Unconventional assets may offer better returns
The first part of the answer is to consider other asset classes; unconventional assets sometimes are priced to offer better returns. Investors should examine an array of non-traditional asset classes, such as emerging market stocks and bonds, high-yield bonds, bank loans, and long TIPS. In addition, non-price weighted indices and well-crafted low-risk equity strategies should be considered.
Managing the asset mix actively
Investors also should actively manage the asset mix, available through Global Tactical Asset Allocation strategies. They should take long-term risk when risk-bearing is likely to be rewarded, and a conservative, well-diversified posture when it is not. Rich forward-looking risk premiums typically prevail when investors are terrified. As Warren Buffet suggests, investors should be “greedy when others are fearful and fearful when others are greedy.”