Balanced Asset Allocation: How to Profit in Any Economic Climate

Chapter 12Implementation StrategiesPutting Theory into Practice

I have described the conceptual logic behind how to efficiently build a balanced portfolio. You have also learned the details of how to construct a balanced allocation by analyzing the economic exposure of various asset classes and appropriately weighting them. It is now time to take the theories that you have studied and apply them in practice.

If you are like most investors to whom I have described the balanced portfolio, your initial reaction may be that the allocation looks highly unconventional. Some of you may even go as far as to say that the logical sequence has been intuitive up to a point, but you are surprised by the unusual allocation and are not sure it makes sense. You may conclude that given historically low interest rates, it is crazy to maintain a portfolio with 60 percent allocated to fixed income strategies. If these concerns are on your mind (or if I just made you think of them), there are two main reasons you should not be overly apprehensive.

First, if one asset class looks unattractive for whatever reason, it is better to think of hedging yourself by adding offsetting asset classes rather than removing the asset class you don't like. For instance, instead of reducing Treasuries because you think yields are too low, you should simply own enough of the asset classes that do well in the environment in which Treasuries do poorly. If you cut the allocation to Treasuries, then you actually increase ...