Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio

You would think that most would question the conventional asset allocation practice of using historical return averages and correlations after the post-Y2K bear market. The markets prove time and time again that past returns are a lousy predictor of future results; and yet, most rely solely on historical data in implementing asset allocation. This mostly leads to chasing performance and being late to the game. At best, it results in "diversified" and mediocre performance. Dr. Canto uses history the right way- by looking at how various economic environments and fiscal and monetary policies influence relative performance between asset classes. One can then approach asset allocation in a forward manner; that is, identify which asset classes have better risk/return prospects given the current and upcoming economic and market climates. It's too easy as an imvestment professional to sell past performance, but it's a bad way to propose an investment strategy and to manage client assets (certainly the "optimal" allocation prescribed by an historical data-fed optimizer almost never performs as well as it did in the past). We've been pleased in using Dr. Canto's approach over the years to management client assets; and I see more and more investment shops integrating his approach. You would think that after some 50 years of Markowitz and the Efficient Frontier, investors will soon realize that like most sciences, investment theory has also evolved, producing new and improved ideas. A great book for the serious investor.

This book sure gives you a lot to think about. And while the author's method of dealing with various matters related to investing different classes of assets, it is NOT a discussion of a general theory of asset investing or portfolio theory. Victor Canto has his own approach to investing and has, for example, developed his own periodic table of asset returns. One of the first things you have to ask yourself is whether you buy into his manner of classification and if this historical data convinces you of anything about the future. A great deal of money has been lost over the years by investing in methods that fit historic data very well. Canto has his own consulting company and what he offers here probably fits well the kind of advice you will get from his firm. I am not saying it isn't useful. Certainly, if you like to look at data closely and taking lots of factors into your investment decisions, this approach can be a great deal of fun for you. He offers insightful comments about taxes, changes in the investment environment, statistical variance and all kinds of semi-technical matters. Certainly, there is enough uncertainty that if it doesn't appear to be working for you it can be explained to you how you misunderstood this or that and didn't get things just right or it would have worked out. Again, I am not saying the book is without value, but I am also cautioning against getting too committed to what the author has put forward. Of course, he might be absolutely right and it could make you rich. Or not.