Digital Wealth

Chapter 22 Conclusion

A key message is that in constructing and maintaining a portfolio, many factors should be considered in parallel, and asset allocation is just one part of the puzzle. Humans don’t do well with a large array of diverse and ever-changing inputs. Fortunately, algorithms are able to excel at this. Asset class selection gets a lot of the attention in investment writing and analysis. Rightly so, since it’s critical to success and to the extent that the period from the 1970s and 2010s has been relatively benign for investors due to falling inflation, the coming decades may offer a greater challenge. However, fees, trading costs, and taxes are equally important, and a portfolio that might appear optimal from an asset allocation standpoint can fall behind due to these hidden costs, which often aren’t on investors’ radars. It’s only when a portfolio is considered after all costs that the optimal solution can be found.

For example, consider Warren Buffett, almost certainly one of the greatest investors of all time. Even he may be having trouble in recent years matching his past performance. Through 2014 the growth in the book value of his company beat the Standard & Poor’s (S&P) 500 by an average of 9.5 percent a year. If you have one of the best investment records on the planet, that is just about the best you can reasonably hope for, during what was also, historically speaking, a pretty good period to be an investor due to generally declining inflation, favorable ...