All about Asset Allocation

Author Ferri cuts through the fog of academic analysis and conventional wisdom and provides common sense advice that investors can use. Of particular value is his discussion of changing correlations among asset classes. If correlations were static, it would be child's play to build a portfolio that sat squarely on the efficient frontier and satisfied any individual's risk tolerance and return requirements. But as he illustrates, correlations between asset classes change over time, sometimes quickly and unpredictably. Since the shifts are unknowable in advance, it is impossible to stay consistently balanced on the knife edge of the efficient frontier. His advice- own a little of everything in some generally accepted proportions and don't sweat the details. That's great counsel, sure to serve most investors well and allow them to sleep at night and enjoy life, rather than worrying about the status of their asset class correlations. I have read Bernstein's "Intelligent Asset Allocator" and Swensen's "Unconventional Success" and this is by far the best of the three.

I was pretty impressed with this book. I give it an A+. I have been a student of investing and financial planning since 1979. In 1978, when Venita VanCaspel's book The New Money Dynamics was published, the term "asset allocation" was not even listed in the index of financial terms. She doesn't really mention asset allocation between asset classes and any benefits of asset allocation. Gary Brinson's 1986 famous study can be defined as the birth of asset allocation. He found that over 90% of a portfolio's return can be determined by the asset classes used, not what the individual investments were. Brinson's findings have been relatively slow to flow through the investment community and to individual investors. Dial the time clock ahead from 1986 to 2006, and one of Business Week's cover stories seeks to explain why the S & P 500's profits have increased dramatically over the last 5 years, yet the S & P 500 companies have had very little stock price appreciation. One explanation offered is that more and more investors practice asset allocation and choose other investments besides the S & P 500 for their portfolios. The increased demand for other asset classes like foreign stocks, commodities, and gold has subsequently less to a decrease in demand for large cap stocks in the S & P 500. Ferri's book does an excellent job of explaining the concept of asset allocation and he uses real life portfolios to illustrate the advantages of asset allocation. Ferri points out the ideal investments to add to one's portfolio would be negatively correlated to the investments in the existing portfolio. He also points out that the correlations between asset classes changes over time. If an investor keeps many different asset classes in his portfolio, the investor can take advantage of these changing correlations over time. All-in-all, a great book for learning the concept of asset allocation. I would suggest companion books to supplement this book including The Richest Man in Babylon, Bogle on Mutual Funds, The Millionaire Next Door, The 4 Pillars of Investing, A Random Walk Down Wall Street, and the Coffeehouse Investor.

My fee-only financial planner recommended that I read this book in preparation for my annual review of investments. He offered to buy back the book if I was dissatisfied. I found the book valuable and therefore did not take him up on his offer. I appreciated Ferri's clear explanation of the concepts of asset allocation accompanied by plenty of data tables and graphs. I also found his technique of limiting each chapter to three or four topics and stating them both and the beginning and end of the chapter very helpful in reviewing what I had learned. Although the topic is complex, Ferri kept his text at the layperson level. It definitely gave me a better understanding of the Modern Portfolio theory principles my financial planner was following in determing my personal asset allocation. Although I have the services of a planner, the book provides enough information for the do-it-yourself type to set up their own plan based on the principles of the book. A particularly nice touch is a list of funds that meet specific asset allocation goals at the end of each chapter explaining that asset class.

If you are looking to get beyond perfomance chasing, and direction-less wandering, start here! The info and technical background are great. It has a great section decribing Modern Portfolio Theory. One thing I have yet to get my mental arms around is (that is discussed in the book): considering that Small cap value funds, REITs, Foreign small funds and Intermediate bonds are shown to be top performers in achieving increased returns and reductions in volatility (standard deviation), why do the suggested portfolios look very similar to everyone elses?... Especially with such low %s in REITs? This book has definitely whetted my appetite for more info on asset allocation and rebalancing. Get it if you want to mature as a mutual fund investor.

This latest book from Richard Ferri, CFA, has all the elements needed to help an investor develop and implement an asset allocation strategy. The book covers the nuts and bolts and provides lots of supporting graphics. In addition, the author provides recommended portfolios for those in various stages of the investment cycle, as well as for investors with varying degrees of risk tolerance (aggressive, moderate or conservative). This book has something for both novices and more sophisticated investors alike. It's a winner!