Reexamining Asset Allocation

Michael Falk, CFA, CRC, Partner, Focus Consulting Group & Founder, MSF Asset Consulting serves PSCA in a number of roles including Co-Chairman of PSCA’s Investment Committee. In the September/October 2012 issue of Defined Contribution Insights, he provided an excellent reexamination of asset allocation in his article, “Asset Allocation for Today’s Times?”

Modern portfolio theory (MPT) and strategic asset allocation are scrutinized more closely in this economy because both investors and investment professionals are less confident. This becomes increasingly problematic for the plan sponsors who must rely on outside investment consultants and advisors in selecting appropriate investment options for their participants.

In his article, Falk presents how our original approach to asset allocation may no longer be as valid as originally conceived.  As a result, there is increased awareness of the concept called adaptive asset allocation. 

Although, not a new concept, Falk introduces the approach in his article:

 “Among those different behaviors are more adaptive styles of asset allocation.  Remember that expected returns over time do not necessarily accurately describe returns in the short-term.  In fact, the short-term often shows prices significantly above or below what might be considered fair value according to Benjamin Graham, noted financial author and father of value investing (not to mention Warren Buffet’s teacher) – “In the short run, the stock market is like a voting machine, but in the long run it is a weighing machine.”

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