Asset allocation needs revisiting
Traditional stocks and bonds are the largest allocations in most investor portfolios. In fact, the 60% stock / 40% bond policy portfolio is often considered the “benchmark” for asset allocation decisions. Investors do two things that hamper their long-term portfolio performance. First, they tend to let their asset allocation drift based on the performance of the underlying assets-- or even worse-- chase performance by allocating to the latest best-performing asset class. Second, their portfolios tend to be dominated by domestic stocks and bonds, often tracking capitalization-weighted indices. This is an inefficient way to manage a portfolio.
GTAA strategy buys low and sells high
Global tactical asset allocation is a strategy that increases investments in asset classes with the highest potential for appreciation and reduces allocations to asset classes with greater potential for loss. Expected returns for different asset classes vary over time and greatly depend on starting valuations. By investing in unpopular assets, GTAA displays a contrarian bent. GTAA uses the constantly changing expectations and emotions of the market to invest in attractively priced assets.
More than just stocks and bonds
Stocks and bonds are just the two most prominent asset classes. There are a host of other asset classes, such as international equities, emerging market debt, real estate, commodities, TIPs, various credits, real return strategies, that provide far greater diversification than a standard 60% stock / 40% bond portfolio. Investors should employ a full toolkit in building their portfolios.
Robert Arnott and Research Affiliates are well recognized in the investment management industry for their expertise in GTAA. The firm is the sub-advisor to the first mutual fund of mutual funds to apply GTAA to alternative asset classes, investing in an array of underlying mutual funds.
Cheap today, expensive tomorrow
Why should investors use a GTAA strategy? The answer is simple: Valuations of assets vary all the time. Equities may be cheap today and expensive tomorrow. Conversely, bonds may be expensive today but more affordable in the future. Return expectations shift constantly; sometimes, taking risk is rewarded, sometimes it is not. Buying what is unpopular and selling securities that are in vogue is hard to do. Unfortunately, most investors do a poor job of deciding when to make shifts in their portfolio.
An absolute-return approach to investing
Our GTAA strategies complement traditional stock and bond portfolios. They provide an absolute-return oriented approach to investing, and are designed to provide protection against inflation-- the main enemy to building and retaining wealth.