Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

The Asset Allocation Model And Pension Value Investing 

Stock-Markets / Pensions & Retirement Oct 07, 2010 - 06:25 AM GMT

By: Christopher_Quigley

Stock-Markets

Best Financial Markets Analysis ArticleAcademic Background - “In 1986, Gary Brinson L. Randolph Hood, and Gilbert L. Beebower (BHB) published a study about asset allocation of 91 large pension funds measured from 1974 to 1983. They replaced the pension funds' stock, bond, and cash selections with corresponding market indexes. The indexed quarterly returns were found to be higher than pension plan's actual quarterly return. The two quarterly return series' linear correlation was measured at 96.7%, with shared variance of 93.6%. A 1991 follow-up study by Brinson, Singer, and Beebower measured a variance of 91.5%.


The conclusion of the study was that replacing active choices with simple asset classes worked just as well as, if not even better than, professional pension managers. Also, a small number of asset classes were sufficient for financial planning. Financial advisors often pointed to this study to support the idea that asset allocation is more important than all other concerns, which the BHB study lumped together as "market timing” One problem with the Brinson” study was that the cost factor in the two return series was not clearly discussed. However, in response to a letter to the editor, Hood noted that the returns series were gross of management fees.”

With the development of Exchange Traded Funds (ETF’s) it has never been easier to embrace the concept of “Asset Allocation Investing.” These ETF’s cover stocks, commodities, bonds, currencies, real estate et al. As the BHB study above indicate an active managed pension fund that chooses individual stocks and bonds does not necessarily mean a more profitable portfolio. The use of indices or ETF’s as investment vehicles however does remove a great deal of the risk associated with “raw” equity, real estate, commodity or bond ownership.

The Value Approach
I am an enthusiastic value investor. I like the concept and it has proven its profitability over the last decade that I have been active in the markets. I believe bringing the techniques of value portfolio management to asset allocation investing is very exciting. Such a strategy blends conservative diversification, with dollar cost averaging (saving in normal parlance) and technical analysis of long term asset class prices.

How does it work in simple terms? For example let us have our investor choose say 3 asset classes for his/her portfolio: Stocks (An ETF of The S & P 500), Real Estate (An ETF of top Real Estate Players) and Gold (An ETF of the commodity). The idea now is to bring into the equation some technical assessment of long term value. Each of our classes will have a different value determinant, as set out below:

Stocks:           PE Ratios
Real Estate:   Rental Income Multiples
Gold:             Inflation Trend Index of Price

With each type of asset we will use in our analysis a long term graph indicating our indicator’s technical/historic trend. Those asset types currently priced significantly beneath the long term asset-class-average would be regarded as undervalued and those assets priced significantly above the long term asset-class-average would be viewed as overvalued.

Now with a pension portfolio we need to obviously have diversification among several asset types but the key to achieving above average returns involves a little more effort. The smart thing to do is invest a disproportionate amount into the class that is undervalued and discharge those classes that are overvalued, in a systematic manner. Remember we will be looking at these shifts in allocation emphasis happening over years not days, weeks or months. Ideally the portfolio should be saved into over a long period of time. Such an approach removes the potential for capital loss through trying to “time” the market on entry. This approach is continued as long as the fund is active. As the portfolio term reaches maturity all classes are systematically sold and shifted into cash starting with those most overvalued. This policy prevents the fund from receiving “value shock” just when liquidity is most needed.

It is interesting to note that some of the world’s best managed “endowment” funds (such as the Harvard Endowment Fund) use the asset allocation approach to investing It has proven spectacularly successful and is one of the reasons more pension funds are choosing this simple self-managed approach rather than sub-contracting their decision making out to conventional equity specialist. The dreadful returns achieved from “passive” equity investment since 2000 has hastened the trend as has the fabulous returns earned through commodity and bond investment over the last three-five years.

Reference: Wikipedia

By Christopher M. Quigley
B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley was born in 1958 in Dublin and holds a Batchelor Degree in Accounting and Management from Trinity College/College of Commerce, Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the Stock Market in 1989. in Belmont, California where he lived for 6 years. He developed the Wealthbuilder investment and trading course over the last decade as a result of research, study, experience and successful application. This course marries Fundamental Analysis with Technical Analysis and focuses on 3 specific approaches. Namely: Momentum, Value and Pension Strategies.

Mr. Quigley is now based in Dublin, Ireland and Tampa Bay, Florida.

© 2010 Copyright Christopher M. Quigley - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Christopher M. Quigley Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules