The Traders Journal

Academics Agree: Asset Allocation is the Only Free Lunch in the Investing Arena


Upfront, it’s important to note that unlike most investors who hear asset allocation and conjure up three asset baskets (stocks, bonds, cash), Tensile Trading presents an exhaustive all-inclusive buffet of 59 different asset classes from which you choose.  Our book also shows to what extent each of these various assets classes is correlated to the S&P 500.  

For example, if you buy the Vanguard Total Market Index (VTI), the correlation to the S&P 500 (SPY) is 0.99 — virtually the same risk and performance, so therefore no diversification.  If, however, you buy Global Biotech (IBB), the correlation improves to 0.55.  That’s diversification!!

The goal of this blog is to convince you to embrace asset allocation as the secret sauce that produces safe growth and outperformance.  A winning recipe that blends simple investing ingredients to produce tasty portfolio profits. Okay — it’s a mouthful but every word is the truth.

Recurring academic studies consistently conclude that “diversification is the only free lunch in investing” AND “a focus on asset allocation is the highest leveraged activity an individual investor can do.” So let’s explore exactly why these realities exist and why it’s important that you devote your precious time to nailing down your own asset allocation profile.

The folks at JP Morgan Asset Management (JPM) have kindly consented to let me use some of their research to help me make my case to you.  Mostly, the conclusions I am citing here are backed up by their extensive research and analytics department.

  1. A couple, aged 65, has a 90% probability that at least one of them will reach the age of 90 years.  With that probability, you can bet that portfolio management matters and demands strategic planning.
  2. In the USA, there is a frightening gap between what retirees will need in their lifetimes and what they have actually accumulated in assets.  Mandatory retirement accounts, government pensions and voluntary savings total less than 69% of their future needs.  I find this both a sobering and scary statistic!
  3. Warren Buffet calls compounding the eighth wonder of the world.  The lesson is clear: start early.  Young people should be taught and encouraged to invest.  In the JPM study, just applying market averages over a 20-year span of reasonable saving and investing would give you a cumulative return of over 252%.  With that result, you’re bound to enjoy your retirement a whole lot more.
  4. When asked how they’ll fund their retirement, 17% of Americans claim that they plan to win the lottery.  This fact simply bankrupts my vocabulary.
  5. A disproportionate percentage of Americans nearing retirement will suddenly panic and swing for the fences trying to hit a financial home-run to compensate for the inadequacy of their present nest eggs.  Here’s the math.  If you lose 60% of your investment, you will need a subsequent gain of 150%.  Wait for it.  Just to get even and recover back to where you were.  This is why prudent asset allocation for all ages is essential. Diversification and asset protection are paramount. Our DVD really digs into the details.
  6. There’s an interesting investing bias depending upon where you live geographically.  If you live on the west coast, your investment portfolio will be more heavily invested in tech stocks by 10% more than the national average.  If you live in the midwest, it will be underweighted by about 8%.  If you live in Texas, you’ll be 14% more weighted in energy stocks, while someone in New England will be 10% underweighted in energy.  In your asset allocation decisions, it’s important to stay objective and not fall into the locality-biased mentality trap based on where you live.
  7. JPM research tells us that American investors have 74% of their assets in US financial instruments and only 26% allocated globally.  When you consider that the United States accounts for only 22% of global GDP, this points out a potentially painful home bias which needs to be overcome.  Prudent planning can do that.
  8. Some of you will remember the ‘Nifty-50 stocks’ of the 1970s.  The belief was that you should buy and then hold these stocks forever with no need to rebalance.  I’ve been preaching for years that this buy-and-hold strategy is dead.  Two observations.  First, some of these Nifty-50 stocks have completely vaporized.  Totally.  Secondly, portfolio drift happens relatively quickly.  For example, an indexed asset mix of 60% equities and 40% bonds in 1997 would have become 69% equities and 31% bonds by 2016 without rebalancing.  JPM research also proves that rebalancing adds to the returns and reduces the risk.  Higher rewards for less risk.  I’ll take it!
  9. Brinson, Hood & Beebower studied thousands of USA pension funds and found that asset allocation is responsible for 90% of variations in portfolio returns.  Many other studies corroborate this conclusion.  It’s both intuitively correct and compelling that your asset weighting decisions are the key determinants of your portfolio’s long-term growth and survival— not to mention reduced volatility and increased diversification.
  10. The Tensile Trading approach to Asset Allocation takes into account “the whole you.” It’s not simply about socking away your assets into a diversified collection of uncorrelated portfolio baskets.  It’s about how you decide to allocate your spending, your debt, your health, and ultimately your time. Financial service firms are not compensated for getting you to consider these important elements. You must take the initiative and find the discipline yourself. Let’s label these the mother of all portfolio allocations.

In conclusion, remember that your time here on planet Earth is precious.  You shouldn’t spend it in a bumper car bouncing randomly off whatever life puts before you.  Planning is the message.  Asset Allocation is the answer.  If you’d like experienced impartial help, (a) read our book and (b) watch our asset allocation DVD. They could literally change your life and ensure a happy retirement. We feel so strongly about this topic that we’ve cut the price of our 5-hour DVD seminar by 33%.

Trade well; trade with discipline!
- Gatis Roze, MBA, CMT
- Grayson Roze


Gatis Roze
About the author: , MBA, CMT, is a veteran full-time stock market investor who has traded his own account since 1989 unburdened by the distraction of clients. He holds an MBA from the Stanford Graduate School of Business, is a past president of the Technical Securities Analysts Association (TSAA), and is a Chartered Market Technician (CMT). After several successful entrepreneurial business ventures, Gatis retired in his early 40s to focus on investing in the financial markets. With consistent success as a stock market trader, he began teaching investments at the post-college level in 2000 and continues to do so today. Learn More
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