Krenzel's Reviews > Asset Allocation: Balancing Financial Risk

Asset Allocation by Roger C. Gibson
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Jun 05, 2008

really liked it
bookshelves: finance
Read in July, 2008

According to some studies, asset allocation can determine up to 90 percent of a portfolio’s performance. Yet neither investors, money managers, nor the financial press seem to give much attention to this topic. In "Asset Allocation: Balancing Financial Risk," author Roger Gibson explains the importance of asset allocation not only in helping investors to realize higher returns, but also in controlling risk. "Asset Allocation" is designed to help investors who have already mastered basic investing concepts to take the next step and practically apply these concepts to design a better portfolio for themselves.

Gibson emphasizes that successful money management requires the successful management of investors’ expectations. Therefore, before actually managing their money and allocating assets to classes such as bonds and stocks, investors should develop an investment philosophy that incorporates a realistic outlook as far as the risk and return they should expect with each asset class, and the relationship of asset classes to one another. As part of this discussion, Gibson provides great detailed information about the historical performance of various investments, including Treasury bills, bonds, and stocks, showing their returns in comparison to their volatility, as well as their correlation to one another. Gibson also discusses the two most important money management risks – inflation and volatility – and illustrates how investors' time horizons are the key variables in determining which risk they should be most concerned with.

Only after investors’ expectations are managed – and they realize that, with reward, comes risk – can they begin to make asset allocation decisions. In discussing the choice between assets, Gibson provides a framework to show investors how diversification can benefit a portfolio but limits most of the discussion to a four-asset-class portfolio, including the S&P 500 (large domestic stocks), EAFE (international stocks, NAREIT (real estate securities) and GSCI (commodities), to provide broad generalizations about the rewards of multiple-asset-class investing. In addition to providing this general discussion, Gibson includes sample asset allocations for investors based on risk preferences. However, the discussion concerning these asset allocations is limited, with no explanation, for example, of why investors with a low risk tolerance would include international bonds and commodities as asset classes in their portfolios and what type of returns these portfolios might generate. Without going into more detail about sample recommended portfolios for different investors, or at least more detail about guidelines he would use for choosing asset classes and allocating percentages to them, Gibson falls short of providing a comprehensive tool for investors to use to actually design their own portfolios.

In the end, "Asset Allocation" spends less time giving practical advice about how to allocate assets and instead spends more time explaining the concepts of why asset allocation is important. For readers looking for more practical guidance on how to allocate their assets, "Asset Allocation" may not be the final answer. However, it still provides valuable information in order to get investors to realistically think about the risk and reward of various asset classes and develop an investment philosophy grounded in the basic concepts of controlling costs and diversifying assets. In his classic investing book, "The Four Pillars of Investing," Dr. William Bernstein included "Asset Allocation" on his recommended reading list for investors who are "good with numbers and don’t mind a little effort." Although it lacks the easy accessibility and organization of "The Four Pillars of Investing," "Asset Allocation" provides just as much information, particularly in the various tables and figures, to give investors who are willing to put in the effort a solid foundation on the important topic of asset allocation.
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