Re: Asset Allocation

From: Stephen Brodeur <sbrodeur@primeon.com>
Subject: Re: Asset Allocation
Date: Thu, 08 Oct 1998 19:01:39 -0400

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I understand that asset allocation techniques can dampen the swings
in portfilio values, much like diversification in general can reduce wild
swings
vs. concentrated holdings.

But I also believe that I heard that asset allocation can actually *beat*
the performance
of the best asset class over the long run. I wish I could remember where I
(think I) heard 
this claim. The rationale for such a claim is something like this:

You pick an allocation scheme that you want to follow for some long period,
based on 
risk tolerance and time frame and all that stuff. You stick with that
allocation mix, and 
"regularly" (yearly?) adjust your holdings to keep in line with the mix.
This has the effect
of capturing gains in strong segments and putting them into weak
(underperforming, and 
possibly undervalued?) segments. Superficially, this sounds like you are
selling your winners
to buy losers (very unappealing). But it also sounds like selling high and
buying low (brilliant).

I think the result is supposed to be that the overall effect of capturing
some of your high
performance gains and buying low into out-of-favor asset classes will give
you a higher net
result than taking the "highest performing class" and just riding the
storm. In order for this to 
work, the gains that you miss by holding the sub-par performers during the
boom times must 
be more than offset by the loss you would suffer when the high flyers crash.

So, my question is, does asset allocation actually outperform individual
asset classes performance
over the long run, or does it just impact the risk and the fluctuations? Is
it a performance vs.
risk/comfort issue, or is it a performance enhancing technique? 

- -Steve Brodeur x222




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