Asset Allocation Is A Strategy For Capturing Average Results

Every investment strategy has its own particular set of pros and cons. Do you know how your strategy’s profile stacks up? As a reference point, consider an unmanaged, market-weighted asset allocation strategy.

You can’t get blood out of a stone and a passive asset allocation will never confer bragging rights for dispensing the best performance (or anything close to it) relative to a broad set of strategies fishing in the same waters. What it will do is reliably deliver something approximating the average return and risk profile for the target opportunity set. That may not sound like much, except when you consider that beating the average is difficult through time.

As an illustration, consider an ETF-based formulation of the Global Markets Index (GMI.F), which holds 14 proxy funds representing a global footprint of the primary risk assets. The portfolio is unmanaged and instead lets the market’s ebb and flow adjust weights through time.

In theory, this is everyone’s benchmark, at least for a given opportunity set, which in this case is loosely defined as global stocks, bonds, securitized real estate and commodities. The theory says this reference portfolio will remain competitive most of the time and history tends to support the claim.

Not surprisingly, holding GMI.F is a relatively dependable methodology to capture, at a portfolio level, the average return of the overall opportunity set. The chart below illustrates the idea by showing performances for the 14 proxy ETFs in GMI.F over the past five years (gray lines) vs. GMI.F’s wealth index (red line). For another perspective, the blue line shows an equally weighted portfolio of the 14 proxy ETFs (the equality is set at the beginning of the period and left unmanaged for the duration of the time window).

Eye-balling the results suggests that GMI.F and the equal-weighted portfolio are reasonably successful in capturing the average results. This is just one five-year period, but other time windows (longer, shorter and over different history periods) offer similar results.

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Disclosures: None.

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