If Asset Allocation has a future, the question is: What assets are in the AA decision? CKW believes the combination of stocks and bonds provide good, hard to beat, risk-adjusted returns over time. Buying stocks makes the buyer an owner and buying bonds makes the buyer a lender. Real Estate, Precious Metals, Commodities, and other so called “hard assets” are stocks and lending to these assets are bonds. The securitization of assets (liquidity) and technology continues to enable a balanced approach of stocks and bonds to outperform. ETF’s, fee compression, and robo are all derivatives of technologies byproduct in our industry. Technology disintermediates the middle man, bringing the need direct to the consumer quicker, better, and cheaper.
The key is to remember: Big Rocks First. To illustrate, start with a can of tennis balls. Open the can and pour sand over the tennis balls until the can is full. Now, pour the contents of the can out. If one does not put the big things back in the can first, everything will not fit back into the can. Stock, Bonds, and Cash are the big rocks, and cheap to buy as part of an Asset Allocation that produces good risk-adjusted rates of return, net of fees. As technology continues to grind away, making things cheaper and more efficient, we need to know how big the rocks we use are. The future of Asset Allocation is being active with the big rocks, not the sand. CKW first decides to underweight what we do not like in the benchmark then over and under allocate to the big rocks and within each of the rocks (stocks) US, EAFE, EM, etc. (bonds) US, Intl, EMD, interest, duration, credit, etc. A global balanced portfolio has many big rocks that will dictate most of the risk-adjusted rate of return over time. If you decide to play with the sand, you are focusing on the less important things than the big rocks. Asset allocation strategists playing with sand need great timing skills of smart alternative factors to equal the big rocks contribution. The balance benchmark is now ranked in the top 20% of its peers.
Successful asset allocation in the future will be getting the right big rocks first as technology continue to grind away at the ones we have now.