Why asset allocation?

by | Jul 29, 2019

“Every good cause is worth some inefficiency.”

– Paul Samuelson

Why asset allocation?

Economist Paul Samuelson (1998) suggested the dictum that equity markets are “micro efficient” but “macro inefficient”. Jung and Shiller created a working paper in November of 2002 that validated this dictum. Their test concluded since 1926 individual firm dividend to price ratios had some “significant predictive power for subsequent growth rates in real dividends: this is evidence of micro-efficiency… Moreover, when the 49 firms are aggregated into an index, the dividend-price ratio gets the wrong sign in the regressions, and is usually insignificant. If anything, high aggregate dividend-price ratios predict high aggregate dividend growth, and so there is no evidence of macro efficiency.” (Jung and Shiller, Working paper 9348, One Simple Test of Samuelson’s Dictum for The Stock Market).

Why does this matter? Because if markets are efficient then capturing the risk premia associated with various risk factors would be difficult to capture as prices would reflect fundamental value and any premia would be quickly arbitraged away. Excess returns would be hard to achieve.

Asset allocation allows for exposure to a wide variety of independent factors. More than a large universe of individual stocks. Exposure to these uncorrelated factors (bets) allows for greater diversification and reduced volatility. There are more premia factors among twelve global asset classes than 500 individual stocks. Also, risk factors, which create the diversity within an asset allocation, are not easily arbitraged away and are more persistent over time because of their link to fundamental economic conditions.

Betting on concentrated market cap strategies has worked well for quite some time. But asset allocation strategies have as well, with significantly lower risk. The more diversified a portfolio the less the chance of long-term under performance and the more likely lower volatility with lower kurtosis. These seem like worthy objectives for your clients and their portfolios. Being prepared in markets that are inefficient rather than trying to predict winners and losers in an arena that is efficient seems prudent and knowledgeable for any fiduciary responsible for portfolio diversification and client goals.

As you consider the information provided with the Salt Creek Investors Asset Allocation Platform (the “Program”), please review the following:

The information and descriptions provided about the Program are for educational and information purposes only and should not be used or construed as investment advice, an offer to sell, a solicitation of an offer to buy, a recommendation for any security, or suggest any course of action. LaSalle St. Investment Advisers (“LSIA”) does not guarantee that the information or descriptions supplied about the Program are complete or timely. LSIA makes no warranty with regard to any results obtained from the Program or its deployment. LSIA is not responsible for any direct or incidental loss incurred by relying on information provided about the Program. The allocations presented herein are illustrations and completely hypothetical. None reflect actual investments or investment results and do not reflect allocation of any individual portfolio. Asset allocation and its results vary over time. Other allocations or asset investment categories not offered in the Program may have characteristics similar or superior to those illustrated. Past performance of any model or allocation is no prediction of future results. Neither the Program nor any system/model can predict the future of any market or price movement in a market. Diversification and asset allocation do not guarantee against the risk of investment loss, including risk of loss of principal. Information provided regarding the Program is as of the date of publication and may change at any time without notice. Information has been included which was obtained from third parties and is believed to be reliable and complete. LSIA does not warrant the accuracy or completeness of such information. LSIA is a registered investment advisor and does not provide tax, accounting or legal advice ‒ the information and/or descriptions provided do not constitute such advice. More information regarding LSIA and its investment strategies can be found in the LSIA brochure, ADV Part II, which is available online or through LSIA. Asset allocation may not be suitable for all investors. Before deciding to invest, potential participants should consult with an investment adviser to determine an appropriate investment strategy and methodology which meets the investor’s specific financial needs, objectives, goals, time horizons and risk tolerance. The information and description provided herein has been made without consideration of any investor’s particular suitability for investing in the Program. Asset allocation also involves investment in various asset classes which are not insured by the government. Investing in fixed income and/or high yield securities involves additional concerns including interest rate risk, credit risk and reinvestment rate risk. Investing in securities outside the United States may entail greater risk than investing in domestic U. S. markets. These risks typically include political and economic uncertainty of foreign countries as well as currency exchange fluctuations, including foreign currency exchange rates, political risks, different methods of accounting, financial reporting and foreign taxes. The prospectus accompanying a security should carefully be reviewed before investing. The services described herein are available to persons residing in any state where they would otherwise be contrary to local law or regulation.


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