Over 60 years ago, a University of Chicago student was searching for a potential research topic for his upcoming dissertation when one of his friends suggested he study the stock market as a possible subject.
This advice led Harry Markowitz to win a Nobel prize for his creation of Model Portfolio Theory (MPT), known to most as Asset Allocation.
The theory of Asset Allocation was designed to mitigate risk by distributing a portfolio over a specific mix of asset classes held over long periods of time. The expected returns, risk, volatility of this mix were estimated using historical (previous) long-term data of each asset class.
Over time, the continued viability of this method has been tested and it’s reliance on long-term averages has shown to hide the true risk and volatility potential over shorter periods of time.
There is also debate concerning the continued relevance of the original factors Asset Allocation was originally built upon.
Many analysts have conceded to the need for an updated approach using new factors that have come along since original methods were first introduced.
In 1997, a research institute was founded to investigate the ongoing potential of traditional methods and identify a potential alternative to manage a portfolio in a more suitable manner using updated factors influential in the New Economy.
After much research, an alternative method known as Adaptive Asset Allocation was introduced.
This strategy was able to enhance probabilities of portfolio success in the current times through an updated approach which included:
1) Using a Dynamic (Adapt and Change) management style rather than the traditional Static (Buy-and-Hold) approach. This update provided the ability to take advantage of economic changes and adapt to fluctuations of volatility.
2) Monthly Re-allocation instead of an asset mix designed to be held 5-10 years at a time to increase growth potential during upward swings while enhancing the probability of preservation through short-term sell-offs.
3) Using short-term Momentum factors to determine expected return potential rather than historical long-term trends to increase exposure in areas showing current strength while reducing holdings displaying signs of weakness.
4) Managing risk through short-term volatility measures rather than a static mix of diversified holdings from historical long-term statistics. This method focuses on short-term volatility with the ability to reduce risk (loss) during short to mid-term cycles rather than relying on a buy-and-hold approach using long-term averages.
Adaptive Allocation has shown to outperform traditional methods (1), with less risk by adapting one’s portfolio ongoing to take advantage of short and mid-term market movements properly.
To put it simpler, this updated approach focuses on maximizing the chance of being right while minimizing the cost of being wrong.
We utilize this approach to guide our client’s portfolios through an ever-changing economy and believe in it’s superior potential to improve probabilities in both long and short term markets over traditional, out-dated methods.
As always, we encourage you to decide for yourself. Research this topic and determine whether or not it might be an appropriate fit for you and your family.
If you would like to learn more, feel free to contact us with any questions.
Disclaimer: This newsletter is a publication dedicated to the education of individual investors. This newsletter is an information service only. The information provided herein is not to be construed as an offer to buy, sell or hold a stock of any kind. All economic and performance data is historical and not indicative of future results.
Current performance may be lower or higher than what is shown. There are many factors that affect investment performance including, but not limited to, general economic and market conditions including market volatility. There can be no assurance that these factors will affect future investment performance in the same manner as historical performance. All investments and investment strategies involve a risk of loss.
Advisory services offered through Enhance Wealth, a member of Advisory Services Network, LLC, 6600 Peachtree Dunwoody Road, Embassy Row 600, Suite 575, Atlanta, GA 30328. 770-352-0449 Insurance products and services offered through Enhanced Capital, LLC. Advisory Services Network, LLC and Enhanced Capital, LLC are not affiliated.
The opinions expressed herein are solely those of the author and do not reflect the opinions of Advisory Services Network, LLC or any of its other advisory representatives.