Biz Direct MarketKnowing When To Make A Good Decision

Alpha beta separation? Can’t beat beta? Beta based asset allocation is supposedly the driver of returns. Many papers claim that it is almost all that matters. That mistake has dominated conventional wisdom for too long. They reached that sample biased conclusion because asset allocation is what the selected investors focused on. Setting a stock/bond/alternatives mix determines variability of returns ONLY if you emphasize it. It is easy to debunk this portfolio construction “axiom” if you seek reliable performance.

Suppose corporate pensions were required to invest 100% in the plan sponsor’s equity. Then we would conclude that security selection drove returns. If investors flipped coins each month to be 100% stocks or bonds then market timing would be the factor. You only have to look at the underfunded liability status of many institutions to see that conventional “choose your betas” asset allocation needs NEW thinking. Some say that those with long term outlooks should have more in risky assets due to the alleged higher “expected” return. Instead investors would be wise to focus on the alpha/beta weights. For anyone with lower risk tolerances and dislike of deep drawdowns, alpha gets the vote.

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