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Asset Allocation & Generally Accepted Investment Principles (Notes & Links)


In addition to whatever you own, you have been given $10,000. You are now asked to choose between:
A. A sure gain of $5000
B. A 50% change to gain $10,000 and a 50% chance to gain nothing.

     Asset allocation is generally the primary determinant of both risk and return in most portfolios. Asset classes can be classified in broad terms like stocks, real estate, bonds, and cash, and they can be subdivided further into large-cap and small-cap, value and growth, international, and combinations of each. Bonds can be subdivided into short, intermediate, and long term, tax-free, high-yield, convertible, and international classifications...





     The question at the start of the chapter is a slightly modified version (by a factor of 10) of the question asked by Daniel Kahneman and Amos Tversky in their 1979 paper.8 In the question at the start of the chapter, 84% chose A. However, the question from Chapter 5 is phrased differently, but is identical in terms of net cash to the subject. 69% chose B in that question, which tells us that people were heavily influenced by how the question was framed even though the net results were the same.

Generally Accepted Investment Principles





Some useful links and references9

Vanguard has several investor questionnaires that will lead you through a series of questions and make a suggested allocation that investors can compare to their current portfolios or other suggestions.
https://personal.vanguard.com/us/FundsInvQuestionnaire
https://advisors.vanguard.com/iwe/pdf/FASINVQ.pdf

American Association of Individual Investors Asset Allocation Models
https://www.aaii.com/asset-allocation

Recommendations from four robo advisers and four human advisers for a hypothetical 35-year-old investor (Marketwatch, May 2, 2015)
https://www.marketwatch.com/story/we-asked-4-robo-advisers-4-human-advisers-for-portfolios-for-the-same-investor-2015-04-21

Nacubo Asset Allocations for U.S. College and University Endowments and Affiliated Foundations
https://www.nacubo.org/-/media/Nacubo/Documents/research/2018-NTSE-Public-Tables--Asset-Allocations--FINAL.ashx (2018)
https://www.nacubo.org/-/media/Nacubo/Documents/EndowmentFiles/2017-NCSE-Public-Tables--Asset-Allocations.ashx (2017)

Callan Target Date Index (Glidepath Allocation)
https://www.callan.com/td-index/

Public pension fund asset allocations

Public pension funds may not be especially comparable to individual portfolios for multiple reasons, but they can provide an interesting reference for many investors to keep in mind. They had a median 56.69% of their holdings in equities as of September 30, 2017 according to Wilshire Trust Universe Comparison Service, as compared with 54.37% a year earlier. They also had 23.3% in bonds, down from 25% a year earlier.10 The following are some examples of large plans that publicly report their asset allocation and they are also interesting to consider in the context of the next chapter, which broadens the discussion to the major investment options and the global investing universe.

California Public Employees' Retirement System (CalPERS)
https://www.calpers.ca.gov/page/investments

California State Teachers Retirement System (Calsters)
https://www.calpers.ca.gov/page/investments

Virginia Retirement System
http://www.varetire.org/Investments/Index.asp

San Bernardino County Employees' Retirement Assnn
https://www.sbcera.org/Investments/AssetAllocation.aspx

Houston Firefighters’ Relief and Retirement Fund
https://www.hfrrf.org/resource-center/investments/


Chapter 12 Notes - The Footnotes in the Book are sequential and for this chapter start at #240 and end at #249.
These notes are provided for those that have purchased the book and would like to access the notes and links directly.


1. Morningstar has been providing commentary and analysis on the target date fund industry for over a decade. See Target-Date Series Research Paper: 2010 Industry Survey http://corporate.morningstar.com/US/documents/MethodologyDocuments/MethodologyPapers/TargetDateFundSurvey_2010.pdf
and Benchmarking Target Date Funds http://corporate.morningstar.com/us/documents/Indexes/BenchmarkingTargetDateFunds.pdf
2. Gary Brinson, Brian Singer, and Gilbert Beebower, Determinants of Portfolio Performance II: An Update, Financial Analysts Journal, May/June 1991.
3. Gary Brinson, Randolph Hood, and Gilbert Beebower, Determinants of Portfolio Performance, Financial Analysts Journal, July/August 1986.
4. William Jahnke, The Asset Allocation Hoax, Journal of Financial Planning, January 1997
5. John Nuttall, The Importance of Asset Allocation http://publish.uwo.ca/~jnuttall/asset.html 2000
6. Roger Ibbotson and Paul Kaplan, Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance? Financial Analyst Journal, January/February 2000. A more recent article about the debate was published in the March/April 2010 Issue of the Financial Analysts Journal “The Importance of Asset Allocation and The Equal Importance of Asset Allocation and Active Management (by James Xiong, Roger Ibbotson, Thomas Idzorek, and Peng Chen). See also Asset Allocation Is King By Thomas M. Idzorek Morningstar Advisor April/May 2010
7. Joseph Davis, Francis Kinniry Jr., and Glenn Sheay, The Asset Allocation Debate: Provocative Questions, Enduring Realities https://www.vanguard.com/pdf/icradd.pdf. Originally published as Tokat, Y., Wicas, N, and Kinniry, F., The Asset Allocation Debate: A Review and Reconciliation. Journal of Financial Planning, 2006. This former paper is a revised and updated version.
8. Daniel Kahneman and Amos Tversky, Prospect Theory: An Analysis of Decision Making Under Risk, Econometrica, 1979
9. Those interested in a very deep and detailed analysis of retirement investing options and scenarios can download “Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity” by Wade Pfau, Joe Tomlinson, and Steve Vernon (November 2017) - 145 page report about structuring retirement portfolios. http://longevity.stanford.edu/wp-content/uploads/2017/11/Optimizing-Retirement-Income-Solutions-November-2017-SCL-Version.pdf
10. https://www.wsj.com/articles/pension-funds-dilemma-what-to-buy-when-nothing-is-cheap-1514808000



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