Asset Allocation Quotes

Capital is a lot like people; it needs to be employed.

At Mayflower-Plymouth, we approach Asset Management from a network and systems perspective as opposed to from just an entity perspective. We learn from nature and we look at how the mycorrhiza network is a manager of Capital and an allocator of Capital, both a means and a method - and we try to operate in the same way.

Asset allocation, where to park your money and how to divide it up, is the single most important skill of a successful investor.

All stakeholders should benefit from the capital we allocate in our portfolio, on a net value add basis.

No group can survive, let alone thrive, unless what is good for the overall community is more important than individual freedom. Take, for example, resource allocation. How can anyone with any intelligence possibly justify, in terms of the overall community, the accumulation and hoarding of enormous material assets by a few individuals when others do not even have food, clothing, and other essentials?” In

In fact, wealth-maximizing individuals compare the after-tax costs of debt with the after-tax returns from bonds, liquidating bond positions to pay off loans when the costs of debt exceed the returns from bonds. Rational investors consider liability positions when making asset allocations.

The problem with long-term investing is the short term.

From an asset-allocation perspective, when we talk about diversification, we're talking about investing in multiple asset classes. There are six that I think are really important and they are US stocks, US Treasury bonds, US Treasure inflation-protected securities [TIPS], foreign developed equities, foreign emerging-market equities and real estate investment trusts [REITS]. p473

big forces to worry about: growth and inflation. Each could either be rising or falling, so I saw that by finding four different investment strategies—each one of which would do well in a particular environment (rising growth with rising inflation, rising growth with falling inflation, and so on)—I could construct an asset-allocation mix that was balanced to do well over time while being protected against unacceptable losses. Since that strategy would never change, practically anyone could implement it.

Your society, at least what I have observed of it, seems not to understand the fundamental inconsistency between individual freedom and the common welfare. The two must be carefully balanced. No group can survive, let alone thrive, unless what is good for the overall community is more important than individual freedom. Take, for example, resource allocation. How can anyone with any intelligence possibly justify, in terms of the overall community, the accumulation and hoarding of enormous material assets by a few individuals when others do not even have food, clothing, and other essentials?

My Future Self My future self and I become closer and closer as time goes by. I must admit that I neglected and ignored her until she punched me in the gut, grabbed me by the hair and turned my butt around to introduce herself. Well, at least that’s what it felt like every time I left the convalescent hospital after doing skills training for a certification I needed to help me start my residential care business. I was going to be providing specialized, 24/7 residential care and supervising direct care staff for non-verbal, non-ambulatory adult men in diapers! I ran to the Red Cross and took the certified nurse assistant class so I would at least know something about the job I would soon be hiring people to do and to make sure my clients received the best care. The training facility was a Medicaid hospital. I would drive home in tears after seeing what happens when people are not able to afford long-term medical care and the government has to provide that care. But it was seeing all the “young” patients that brought me to tears. And I had thought that only the elderly lived like this in convalescent hospitals…. I am fortunate to have good health but this experience showed me that there is the unexpected. So I drove home each day in tears, promising God out loud, over and over again, that I would take care of my health and take care of my finances. That is how I met my future self. She was like, don’t let this be us girlfriend and stop crying! But, according to studies, we humans have a hard time empathizing with our future selves. Could you even imagine your 30 or 40 year old self when you were in elementary or even high school? It’s like picturing a stranger. This difficulty explains why some people tend to favor short-term or immediate gratification over long-term planning and savings. Take time to picture the life you want to live in 5 years, 10 years, and 40 years, and create an emotional connection to your future self. Visualize the things you enjoy doing now, and think of retirement saving and planning as a way to continue doing those things and even more. However, research shows that people who interacted with their future selves were more willing to improve savings. Just hit me over the head, why don’t you! I do understand that some people can’t even pay attention or aren’t even interested in putting money away for their financial future because they have so much going on and so little to work with that they feel like they can’t even listen to or have a conversation about money. But there are things you’re doing that are not helping your financial position and could be trouble. You could be moving in the wrong direction. The goal is to get out of debt, increase your collateral capacity, use your own money in the most efficient manner and make financial decisions that will move you forward instead of backwards. Also make sure you are getting answers specific to your financial situation instead of blindly guessing! Contact us. We will be happy to help!

Stage 2: People and Their Countries Are Rich but Still Think of Themselves as Poor. Because people who grew up with financial insecurity typically don’t lose their financial cautiousness, people in this stage still work hard, sell a lot to foreigners, have pegged exchange rates, save a lot, and invest efficiently in real assets like real estate, gold, and local bank deposits, and in bonds of the reserve currency countries. Because they have a lot more money, they can and do invest in the things that make them more productive—e.g., human capital development, infrastructure, research and development, etc. This generation of parents wants to educate their children well and get them to work hard to be successful. They also improve their resource-allocation systems, including their capital markets and their legal systems. This is the most productive phase of the cycle. Countries in this stage experience rapidly rising income growth and rapidly rising productivity growth at the same time. The productivity growth means two things: 1) inflation is not a problem and 2) the country can become more competitive. During this stage, debts typically do not rise significantly relative to incomes and sometimes they decline. This is a very healthy period and a terrific time to invest in a country if it has adequate property rights protections. You can tell countries in this stage from those in the first stage because they have gleaming new cities next to old ones, high savings rates, rapidly rising incomes, and, typically, rising foreign exchange reserves. I call countries in this stage “late-stage emerging countries.” While countries of all sizes can go through this stage, when big countries go through it, they are typically emerging into great world powers.

Smart Sexy Money is About Your Money As an accomplished entrepreneur with a history that spans more than fourteen years, Annette Wise is constantly looking for ways to give back to her community. Using enterprising efforts, she qualified for $125,000 in startup funding to develop a specialized residential facility that allows developmentally disabled adults to live in the community after almost a lifetime of living in a state institution. In doing so, she has provided steady employment in her community for the last thirteen years. After dedicating years to her residential facility, Annette began to see clearly the difficulty business owners face in planning for retirement successfully. Searching high and low to find answers, she took control of financial uncertainty and in less than 2 years, she became a Full Life Agent, licensed Registered Representative, Investment Advisor Representative and Limited Principal. Her focus is on building an extensive list of clients that depend on her for smart retirement guidance, thorough college planning, detailed business continuation, and business exit strategies. Clients have come to rely on Annette for insight on tax advantaged savings and retirement options. Annette’s primary goal is to help her clients understand more than just concepts, but to easily understand how money works, the consequences of their decisions and how they work in conjunction with their desires and goal. Ever the curious soul who is always up for a challenge, Annette is routinely resourceful at finding sensible means to a sometimes-challenging end. She believes in infinite possibilities as well as in sharing her knowledge with others. She is the go-to source for “Smart Wealth Solutions.” Among Annette’s proudest accomplishments are her two wonderful sons, Michael III and Matthew. As a single mom, they have been her inspiration and joy. She is forever grateful to the greatest brothers in the world- Andrew and Anthony Wise, for assistance in grooming them into amazing young men.

Collateral Capacity or Net Worth? If young Bill Gates had knocked on your door asking you to invest $10,000 in his new company, Microsoft, could you get your hands on the money? Collateral capacity is access to capital. Your net worth is irrelevant if you can’t access any of the money. Collateral capacity is my favorite wealth concept. It’s almost like having a Golden Goose! Collateral can help a borrower secure loans. It gives the lender the assurance that if the borrower defaults on the loan, the lender can repossess the collateral. For example, car loans are secured by cars, and mortgages are secured by homes. Your collateral capacity helps you to avoid or minimize unnecessary wealth transfers where possible, and accumulate an increasing pool of capital providing accessibility, control and uninterrupted compounding. It is the amount of money that you can access through collateralizing a loan against your money, allowing your money to continue earning interest and working for you. It’s very important to understand that accessibility, control and uninterrupted compounding are the key components of collateral capacity. It’s one thing to look good on paper, but when times get tough, assets that you can’t touch or can’t convert easily to cash, will do you little good. Three things affect your collateral capacity: ① The first is contributions into savings and investment accounts that you can access. It would be wise to keep feeding your Golden Goose. Often the lure of higher return potential also brings with it lack of liquidity. Make sure you maintain a good balance between long-term accounts and accounts that provide immediate liquidity and access. ② Second is the growth on the money from interest earned on the money you have in your account. Some assets earn compound interest and grow every year. Others either appreciate or depreciate. Some accounts could be worth a great deal but you have to sell or close them to access the money. That would be like killing your Golden Goose. Having access to money to make it through downtimes is an important factor in sustaining long-term growth. ③ Third is the reduction of any liens you may have against these accounts. As you pay off liens against your collateral positions, your collateral capacity will increase allowing you to access more capital in the future. The goose never quit laying golden eggs – uninterrupted compounding. Years ago, shortly after starting my first business, I laughed at a banker that told me I needed at least $25,000 in my business account in order to borrow $10,000. My business owner friends thought that was ridiculously funny too. We didn’t understand collateral capacity and quite a few other things about money.

William J. Bernstein and Robert D. Arnott, “Earnings Growth: The Two Percent Dilution,” Financial Analysts Journal 59:5 (September/October, 2003): 47–55.

Compared to females from a same-sex twin, the study concludes that female twins from an opposite-sex pair: allocates more of her financial assets to equity; invests in a higher-risk portfolio, as measured by return volatility; and allots a higher proportion to individual stocks relative to mutual funds.

Overconfident investors generally believe that they have more knowledge and information than they actually have. As a result, they tend to trade too much and underperform the market.

Foreign stocks have historically offered several benefits for U.S. investors. First, foreign stocks do not always move in correlation with the U.S. equity markets, which creates a diversification opportunity. Second, international stocks trade in foreign currencies. This offers investors a hedge against a decline in the U.S. dollar. Both are important reasons to have some foreign stock exposure in a portfolio.

The enemy of a good asset allocation is the quest for a perfect one. Fight the urge to be perfect.

There are no risk-free investments after taxes and inflation.

The lesson we learn from Tables 2-2 and 2-3 is that higher volatility of returns leads to lower compounded returns and vice versa. Accordingly, any strategy that lowers the return volatility of the portfolio without lowering the simple average return will increase the compounded return.

Volatility creates lower returns and thus is itself a risk. If you can reduce the volatility in a portfolio, then the compounded return moves higher, closer to the simple average return of the weighted investments in the portfolio. This is how lower portfolio price volatility increases portfolio return over time.

Investors who take no investment risk should expect no return after adjusting for inflation and taxes. Unfortunately, taking investment risk also means that you can and will lose money at times. There is simply no way around this. There is no free lunch.

Asset allocation eliminates the need to predict the near-term future direction of the financial markets and eliminates the risk of being in the wrong market at the wrong time.

Markowitz’s ideas on stock diversification eventually became known as efficient market theory (EMT). This is the general concept that markets are efficiently pricing securities based on known information, and therefore a market portfolio is the most efficient portfolio.

It is not prudent to attempt to switch and swap asset classes based on short-term market predictions.

Diversifying across many investments that are dissimilar and rebalancing those investments to their original target at the end of the year can reduce the annual volatility of the portfolio over time by enough to increase the compounded return. This “free lunch” from rebalancing is the essence of modern portfolio theory.

The Upside of Heuristics The economist Harry Markowitz won the 1990 Nobel Prize in Economics for developing modern portfolio theory: his groundbreaking “mean-variance portfolio optimization” showed how an investor could make an optimal allocation among various funds and assets to maximize returns at a given level of risk. So when it came time to invest his own retirement savings, it seems like Markowitz should have been the one person perfectly equipped for the job. What did he decide to do? I should have computed the historical covariances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions fifty-fifty between bonds and equities. Why in the world would he do that?

Retirement Lifestyle Planning There are four (4) major financial questions that you must be able to answer in order to know if your current or future plan will work for you. What rate of return do you have to earn on your savings and investment dollars to be able to retire at your current standard of living and have your money last through your life expectancy? How much do you need to save on a monthly or annual basis to be able to retire at your current standard of living and your money last your life expectancy? Doing what you are currently doing, how long will you have to work to be able to retire and live your current lifestyle till life expectancy? If you don’t do anything different than you are doing today, how much will you have to reduce your standard of livingat retirement for your money to last your life expectancy? Motto for Retirement Lifestyle Planning A solid financial plan is a powerful possession that offers a sense of peace and freedom. Our process allows us to determine appropriate strategies and help you understand how to achieve your goals and live your dreams. Our process stresses informed financial decision making. We encourage you to review all decisions with your team of tax and legal professionals. For the record, we are not tax or legal professionals and this information is not intended as tax or legal advice. Now we’d like to remind you that a well-executed financial plan requires diverse knowledge and utilizes some or all of the following strategies and services: -Retirement Lifestyle Planning Making the most of your employer-sponsored retirement plans and IRAs. Determining how much you need to retire comfortably. Managing assets before and during retirement including Social Security analysis. -Estate Planning Referring you to qualified Estate Attorneys to review your wills and trusts to help preserve your estate for your intended heirs by helping with beneficiary designations. Reducing exposure to estate taxes and probate costs. Coordinating with your tax and legal advisors. -Tax Management Helping to reduce your current and future tax burden by considering multiple strategies for review by your tax professional.Also, referring you to qualified tax specialists if needed. -Legacy Planning/Charitable Planning Creating a solid future for generations to come by ensuring that your legacy will live on through those you love or causes you care deeply about. -Risk Management Reviewing existing insurance policies. Recommending policy changes when appropriate. Finding the best policy for your individual wants and needs. -Investment Planning Determining your asset allocation needs. Helping you understand your risk tolerance. Recommending the appropriate investment vehicles to help you reach and exceed your goals.

Business Owner Planning Business owners have additional and complex Retirement Planning needs. Counting only on the sale of your business requires tremendous luck and success. If business owners consider the business as simply one asset among many, then they should seriously consider additional assets such as: -Executive Bonus Arrangements -Nonqualified deferred compensation plans -Qualified retirement plans -General investment portfolio Motto for Business Owner Planning As I look back on thirteen years of entrepreneurship, I can see that the best and smartest thing to do is to have a plan with the end in mind and you in mind. The time still goes by and time is expensive. That sentence is really a whole book and you should or will understand sooner than later, hopefully. That would have looked like business succession planning. Proper business succession planning requires sound preparation in order to have a smooth and equitable transition. Financial, tax and legal planning are all necessary for a success.

Your Personal Economic Model One tool we use when discussing the best course of action to secure your financial future is the Personal Economic Model®. Just as a medical doctor would use an anatomical model to convey medical concepts, we use the following model to convey financial concepts. This model offers a visual representation of the way money flows through your hands. On the left, you will notice the Lifetime Capital Potential tank, which illustrates that the amount of money you will control during your lifetime is both large, as well as finite. Most people are shocked to see how much money can flow through their hands in their lifetime. Once earned, your money flows directly to the Tax Filter where the state and federal governments take tax dollars owed from your paycheck. The after tax dollars are then directed to either your Current Lifestyle or your Future Lifestyle. Your management of the Lifestyle Regulator determines where these dollars go. Regulating the cash flow between your current lifestyle desires and your future lifestyle requirements may be the most important financial decision you will ever make. Here’s why. Each and every dollar that is allowed to flow through to your Current Lifestyle is consumed and gone forever. The goal is to accumulate enough money in the Savings and Investment tanks so that when you retire, the dollars in those tanks can be used to pay for your future lifestyle requirements. Retirement planning seems hard for most people to do but it is not rocket science. The best position, position A, would be to have enough in the tanks so that you can live in the future like you live today adjusted for inflation and have your money last at least to your life expectancy. That’s a win, but the icing on the cake would be to accomplish that with little to no impact on your present standard of living, and that is exactly what we strive to help our clients to do. Working with us can help you with the following: Optimize the balance between your Current and Future Lifestyles Identify inefficiencies in your current personal economic model (where are you losing money) Design, implement, and execute a plan to secure your financial future Limit the impact on your Current Lifestyle dollars (maintain your current standard of living)

Zero Line Spender, Saver, Wealth Creator Your financial personality type determines your financial position in life. Let’s say there is a zero financial line that represents a position where you owe nothing and have nothing. Perhaps you can remember those days getting started on your own. So, let us assume you just graduated from college and you’re one of the lucky few who graduated at the zero line, you owe nothing. Pretty amazing considering that in 2013, the debt on student loans exceeded all credit card debt owed in America. But fortunately, you made it out free and clear to the zero line. You’re a “Spender” so you go to the showroom and pick one out. With your job and the car as collateral, you get a car loan and you drop below the zero line. You lifestyle gets more and more expensive and since you are a ‘Spender” you probably take on credit card debt to help finance your lifestyle desires. You are constantly working your way back to becoming a zero, financially speaking. Then, you get married and now there are two in debt working their way back to zero. Eventually, children come along, and the odds of being able to put away enough money to pay your debt and interest and live on the top side of the zero line are becoming virtually impossible. Unfortunately, many Americans live in this position with little or no chance of ever living debt free. When something comes along that requires their savings, they must deplete their funds in order to avoid paying interest and then they must start saving again for their next expense. They are constantly returning to the zero line. The money they have accumulated is compounding interest, giving them uninterrupted growth. Having access to capital allows them to negotiate more favorable loans by collateralizing against their accounts rather than depleting them. They make payments to the lending institution with dollars from their current cash flow, protecting the growth of the money they have saved and invested for their future. Saving and investing with uninterrupted compounding is an important wealth concept for moving further and further away from the zero line.

Tax-Deferred does not mean Tax-Free It never ceases to amaze me when I meet with people who do not know that tax-deferred does not mean tax-free. You mean I have to pay taxes when I take this money!? This is not all mine!? These are common remarks I hear as we are looking at their most recent retirement account statement. Somehow this consideration was missed when they enrolled in the savings plan and each year when they postponed the tax when filing their tax return. I am not a tax professional but I can understand how an accountant or tax preparer wouldn’t think to make sure the client understands that they are postponing taxes and the tax calculation during their working years. I met an accountant that expressed how difficult it is when he gets the client that believed they were ready to leave work only to find out that because of taxes they are coming up a little or a lot short. This happened to one of my relatives that worked at least 30 years as an x-ray technician and then supervisor at a very large hospital. While working, they always had the nice houses, the nice cars, and a nice upper-middle class lifestyle, nothing fancy. After he retired and even though his wife still worked as a school principal, he had to take a sales clerk job at a nearby liquor store so that his family could maintain their lifestyle. I will never forget other relatives joking and laughing about him miscalculating his retirement. I’m certain that his unsuccessful retirement and that of other relatives influenced my interest in retirement planning if for no one else but me. With a limited amount of retirement income, most retirees would prefer to keep their dollars rather than give them to Uncle Sam. Even those with an unlimited source of funds don’t want to pay more taxes than necessary. Fortunately, there are some ways to decrease your tax burden once you’ve done the obvious work of ensuring you’ve taken all the deductions and credits to which you’re entitled when you file your taxes.

Investing is a journey of lifelong learning

The tools of traditional finance, like modern portfolio theory, can help investors establish efficient portfolios to maximize their wealth with acceptable levels of risk. However, mental accounting makes it difficult to implement these tools. Instead, investors use mental accounting to match different investing goals to different asset allocations. This often leads to investors diversifying their portfolios by goal rather than in total. When investors pick investments in each goal-focused mini portfolio, they examine each choice’s individual risk and return characteristics and ignore their diversification characteristics. They eliminate the choices they view as inferior and then often simply divide their money equally among the acceptable choices.

Employees who work for a company whose stock price increase ranked among the top 20 percent of all firms in the past five years allocated 31 percent of their contributions to the company stock. This compares to an allocation of only 13 percent to company stock in firms whose performance was in the worst 20 percent. The actual 401(k) asset allocation behavior of employees suggests that they use the past price trend (the representativeness bias) as a determinant for investing in the company stock (the familiarity bias).

The category of small-cap value represents approximately 3 percent of the capitalization of the broad U.S. market.

Investors who followed a broadly diversified asset allocation that included a total market fund and a small value index fund would have faired very well during the past decade.

The point on Figure 6-8 that is most interesting is a portfolio representing 70 percent in the broad market and 30 percent in the small value index. Over a 30-year period, a mix of 70 percent in the total market and 30 percent in the small-cap value index would have increased U.S. equity returns by 2.0 percent with very little increase in observed portfolio risk. Figure

Stock investors should expect periods of time when equities do not make money after inflation. It is the nature of investment risk. This is also why time in the market is critical to stock investors. In the long run, equities have outpaced inflation by a wide margin, and they are expected to remain one of the best real return investments in the future. You have to stay invested during all market conditions to benefit from the gains. U.S.

Mixing a broad index fund with small-cap value has produced the best results. U.S. equities are a core position in almost every growth investor’s portfolio.

The broad U.S. market returned 10.9 percent annually from 1950 to 2009. That handily beat the 6.1 percent return on five-year Treasury notes and the 3.8 percent level of inflation. Table 6-1 shows the inflation-adjusted returns over different periods of time. Inflation-adjusted returns are also known as real returns because that is the amount of purchasing power investors gained or lost. The real return does not include taxes. Real returns reinforce the fact that inflation is an invisible tax on all investments. The portion of return that is related to inflation cannot be counted as investment gain. When creating an asset allocation for your portfolio, you should always consider the expected real return of the investments you are considering. TABLE

Have clear objectives, understand your risk profile and return requirements, allocate your investments in asset classes (equity,

STP is the best way to systematically change the asset allocation. STP

This book does not agree with this view. It cannot be assumed that efficient asset allocation will result if investment decisions are made by the investing equivalent of kelp and plankton of the marine food chain—uneducated passive reactors whose goal in investing is to outperform a market consistently.

Asset allocation: “They absolutely, beyond a shadow of a doubt, know they’re going to be wrong . . . so they set up an asset allocation system that will make them successful. They all agree asset allocation is the single most important investment decision.

The most important behavior on your part involves dedicating a disproportionate share of your own time, attention, and discretionary resources to creating new business models. Existing businesses, and the leaders in charge of them, face little difficulty in articulating their needs, building a case for their support, and attracting people. Entrepreneurial initiatives, on the other hand, are usually seen as marginal or unimportant in their early stages. Unless you personally allocate to them disproportionate attention, disproportionate resources, and disproportionate talent, they will get squeezed by the existing business to the extent that they never have a chance to take off. Your challenge is to provide counterpressure to the inertial forces that lead your people to constantly attend to the demands of today’s business. [...] By disproportionate resources, we mean budget, access to operating capacity or operating assets, and, most vitally, the very best people. Ironically, these are the very resources that are highly desired by managers of the existing business, who are apt to hotly contest any other claim on them. Like the payment of disproportionate attention, the disproportionate allocation of resources to new business models has its costs. Every dollar and every hour of operations capacity allocated disproportionately to entrepreneurial initiatives is money and time denied the existing business. Disproportionate allocation must be a deliberate process, with commitment of resources being visibly recognized as a matter of strategic choice, not a struggle between long- and short-term goals. [...] Finally, you must be prepared for your organization’s top talent to work on entrepreneurial initiatives. This can create a painful dilemma. When top talent works on an entrepreneurial initiative, the current business is weakened accordingly. However, if only mediocre talent is assigned to the difficult task of new business development, the ventures are doomed. Furthermore, allowing ventures to be run by mediocre people sends an even stronger signal to the rest of the business about your real priorities. The smart people in the firm will recognize that business development is not truly a priority for you, and they will organize their own priorities accordingly. The message: If you don’t walk the talk, only the dumb people will listen.

I’ve often been cited as an advocate for a similar simple and seemingly rigid asset allocation: your bond position should equal your age, with the remainder in stocks. That asset allocation strategy can serve the needs of many—if not most—investors quite well, but it was never intended to be more than a rule of thumb, a place to begin your thought process.

Of course, I also dismiss the idea that the alpha term in the equation has to be zero. Investment skill exists, even though not everyone has it. Only through thinking about risk-adjusted return might we determine whether an investor possesses superior insight, investment skill or alpha . . . that is, whether the investor adds value. The alpha/beta model is an excellent way to assess portfolios, portfolio managers, investment strategies and asset allocation schemes. It’s really an organized way to think about how much of the return comes from what the environment provides and how much from the manager’s value added. For example, it’s obvious that this manager doesn’t have any skill: Period Benchmark Return Portfolio Return 1 10 10 2 6 6 3 0 0 4 −10 −10 5 20 20 But neither does this manager (who moves just half as much as the benchmark): Period Benchmark Return Portfolio Return 1 10 5 2 6 3 3 0 0 4 −10 −5 5 20 10 Or this one (who moves twice as much): Period Benchmark Return Portfolio Return 1 10 20 2 6 12 3 0 0 4 −10 −20 5 20 40 This one has a little: Period Benchmark Return Portfolio Return 1 10 11 6 2 8 3 0 −1 4 −10 −9 5 20 21 While this one has a lot: Period Benchmark Return Portfolio Return 1 10 12 2 6 10 3 0 3 4 −10 2 5 20 30 This one has a ton, if you can live with the volatility: Period Benchmark Return Portfolio Return 1 10 25 2 6 20 3 0 −5 4 −10 −20 5 20 25 What’s clear from these tables is that “beating the market” and “superior investing” can be far from synonymous—see years one and two in the third example. It’s not just your return that matters, but also what risk you took to get it.

Controlled economy was the economic base of totalitarianism and fertile soil for bureaucratic privilege. Under a highly centralized political and economic system, survival depended on bureaucrats who could arbitrarily allocate state assets and ration the necessities of daily life. A strict household-registration system ensured that the vast majority of China’s peasants never ventured far from where they were born. Employees of government organs and state-run enterprises had their housing and all their daily necessities allocated by their work units. Secret dossiers decided the fate of every cadre and worker.

Depreciation is the method accountants use to allocate the cost of equipment and other assets to the total cost of products and services as shown on the income statement. It is based on the same idea as accruals: we want to match as closely as possible the costs of our products and services with what was sold. Most capital investments other than land are depreciated. Accountants attempt to spread the cost of the expenditure over the useful life of the item. There’s more about depreciation in parts 2 and 3.

But some investors and analysts fret that given the strength of the trend toward greater passive investing, the market’s efficiency will gradually atrophy, with potentially dire consequences. “A given investment in active may or may not be the best decision for an individual particular investor but for the system overall there is a benefit in the efficient allocation of capital,” Fraser-Jenkins argued.21 “Rather than looking at the real economy and seeking to understand its future development, passive allocation self-referentially looks to the financial economy to inform its asset allocation choices.

Cash Cushion = (Annual Spending − Annual Yield) × Number of Years This is the portfolio I started out with: Asset Type Allocation Yield Bonds 40% 3% Canadian Index 20% 2.5% US Index 20% 1.75% EAFE Index 20% 2.5%

First, Modern Portfolio Theory only works if a portfolio has some fixed income as well as some equity. This system breaks down if you’re too tilted one way or the other. For example, during a stock market crash like the one we had, if I had been holding 100 percent equity, rebalancing wouldn’t work. As the stock market plummeted, there would have been no complementary asset that would rise, so my allocations wouldn’t have changed and I’d have had nothing to rebalance. That’s why I advise not going above 80 percent equity, even if you’re an aggressive investor.

In this post I am going to take a look at what an investor can do to improve a hedge fund investment through the use of dynamic capital allocation. For the purposes of illustration I am going to use Cantab Capital’s Aristarchus program – a quantitative fund which has grown to over $3.5Bn in assets under management since its opening with $30M in 2007 by co-founders Dr. Ewan Kirk and Erich Schlaikjer.

Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve. —Talmud (c. 1200 BC–AD 500)

Time is money to successful salespeople. They want to spend their time selling. Waste their time and you reduce their earning capacity, their morale, and the company’s top and bottom line. Allocating corporate resources to inefficient processes or events will waste sales time, corporate assets, and send the wrong messages to the sales force.

Choose your asset allocation, pick good assets, and keep your account on autopilot going forward.

No liquid investment alternatives with stable guaranteed principal values exist that can provide real returns by consistently beating the combined impact of inflation and income taxes.

The 2012 Ibbotson® Stocks, Bonds, Bills, and Inflation® Classic Yearbook, published by Morningstar, Inc., is one of the best sources of up-to-date information regarding the performance of various U.S. capital market investment alternatives. The data cover the period from 1926 to the present.

Choosing your portfolio's overall asset allocation is the most important investment decision you will make.

Although you should not let your emotional responses dictate your allocation, you do need to sleep at night, and your personal preferences are an important part of your asset class structure.

There's a saying on Wall Street that certain investments are sold, not bought, in that they require a salesman to push them on a willing investor rather than the buyer actively seeking them out. This would certainly apply to non-traded REITS. Because the first question any investor, or for that matter well-intentioned advisor, should ask before considering non-traded REITs is how the sector is likely to perform going forward. Asset allocation, the choice of how much an investor should put in stocks, investment grade bonds, REITs, high-yield bonds, commodities, or any other asset class generally drives 80% to 90% of the investor's overall return.

I hope that almost every adult will become an investor. When I became an investment counselor there were only 4 million shareholders in America, and now there are 48 million. The amount of money invested in American mutual funds is now 1,000 times as great as it was 55 years ago. Thrift, common sense, and wise asset allocation can produce excellent results in the long run. For example, if you begin at age 25 to invest $2,000 annually into your Individual Retirement Account where it can compound free of tax, and if you average a total return of 10 percent annually, you will have nearly a million dollars accumulated at age 65.

But the current investment banking model—whether applied in a standalone institution such as Goldman or in a broad financial conglomerate such as Deutsche Bank—is at the heart of the problems the finance sector poses for the real economy. Investment banks today engage in securities issuance, corporate advice and asset management; they make markets in equities and FICC, and trade in these markets on their own account. It is only necessary to list these functions to see that each of these activities conflicts with all the others. Each should be undertaken in distinct institutions. And with lower volumes of inter-bank trading, a diminished role for public equity markets and much more direct investment by asset managers the scale of most of these activities should be much reduced. Among all the actors in the finance sector today, only the asset manager, who typically earns a fee calculated as a percentage of funds under management, is rewarded for idleness. The profits of a segregated deposit-taking bank would similarly depend primarily on the scale of the deposit base, and secondarily on its success in making good loans. Dedicated channels of capital allocation have a more appropriate incentive structure than activities focused on trading and transactions. Whenever

A better approach is to put your investment strategy on autopilot by consciously not changing your asset allocation or investment mix unless there is a significant change in your own circumstances.

The economist Harry Markowitz won the 1990 Nobel Prize in Economics for developing modern portfolio theory: his groundbreaking “mean-variance portfolio optimization” showed how an investor could make an optimal allocation among various funds and assets to maximize returns at a given level of risk. So when it came time to invest his own retirement savings, it seems like Markowitz should have been the one person perfectly equipped for the job. What did he decide to do? I should have computed the historical covariances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions fifty-fifty between bonds and equities. Why

Do you have the fortitude and discipline to stick with your predetermined investment strategy (asset allocation) when the going gets rough?” Successful investment management depends to a large degree on the ability of an individual to withstand the periods of stress and on his/her ability to overcome the severe emotional hurdles present during bear markets like the ones experienced in 1973–74 and 2000–02. In

The problem with long-term investing is the short term. Nothing destroys a good long-term plan like extreme short-term volatility. That throws people off track, and they often do things that are emotional rather than rational.

If your are an expatriate, a 'will' is required because, the laws of the country in which you reside would be different from that of your home country, and when the inevitable (death) occurs (untimely), your property /possessions may be exposed to the discretion of the state laws for the allocation of your property to someone, you may have never wished that they possess your property and be an heir to your assets.

I know that there are good and bad environments for all asset classes. And I know that in one’s lifetime, there will be a ruinous environment for one of those asset classes. That’s been true throughout history.” Ray Dalio, founder Bridgewater Associates

The Prussian General Karl von Clausewitz once said, “The greatest enemy of a good plan is the dream of a perfect plan.

The government owns, either directly or indirectly, almost all of China’s land and roughly two-thirds of its productive assets, enabling it to quickly allocate resources on an enormous scale.

Many people begin investing their money without a true understanding of what has happened in the past, and often bias their expectations toward their own personal experiences.

The Fed targets inflation. Everything else is determined by the economic forces that accompany its 2-percent inflation target.

There are three crucial things which must be monitored regularly. In order of importance, they are 1) investment returns relative to your financial plan requirements, 2) your asset allocation, and 3) the quality of your investments. But just how often should you review those things? The answer is, “It depends.

In divorce the contract between wife and husband is being broken and the courts may need to mediate the division of assets, but children are not assets and the state can not interfere by allocating the children without a high standard of proof that one parent is unfit. Therefore

A Quantitative Approach to Tactical Asset Allocation.”)

Borio cast aside the money veil to reveal a world of asset price bubbles, financial cycles, and credit booms and busts: ‘Think monetary! Modelling the financial cycle correctly … requires recognising fully the fundamental monetary nature of our economies,’ was Borio’s clarion call.7 The financial system, he asserted, doesn’t just allocate resources, it generates purchasing power. It has a life of its own. Finance and macroeconomics are ‘inextricably linked’. We inhabit a looking-glass world. Finance does not mirror reality, but acts upon it.fn2 Economics without finance, said Borio, is like Hamlet without the prince.

Capital discipline. CEOs who are good capital allocators typically offer commentary about returns on investment, on invested capital, and on assets. The strength or weakness of a CEO’s capital discipline is expressed in the commentary about book value or market value.

Thinking, Fast and Slow by Daniel Kahneman The Four Pillars of Investing by William Bernstein The Little Book of Common Sense Investing by John Bogle The Little Book of Behavioral Investing by James Montier Stocks for the Long Run by Jeremy Siegel The Warren Buffett Portfolio by Robert Hagstrom Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe Investing: The Last Liberal Art by Robert Hagstrom Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael Mauboussin Devil Take the Hindmost by Edward Chancellor The Most Important Thing by Howard Marks All About Asset Allocation by Rick Ferri Winning the Loser's Game by Charles Ellis

Asset allocation is everything!

20 In 1932, Adolf A. Berle and Gardiner C. Means, lawyer and economics professor, respectively, published The Modern Corporation and Private Property, a highly influential study revealing that top executives of America’s giant companies were not even accountable to their own shareholders but operated the companies “in their own interest, and…divert[ed] a portion of the asset fund to their own uses.”21 The only solution, concluded Berle and Means, was to enlarge the power of all groups within the nation who were affected by the large corporation, including employees and consumers. They envisioned the corporate executive of the future as a professional administrator, dispassionately weighing the claims of investors, employees, consumers, and citizens, and allocating benefits accordingly. “[I]t seems almost essential if the corporate system is to survive—that the ‘control’ of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning each a portion of the income stream on the basis of public policy rather than private cupidity.

Ants aren’t smart,” Gordon says. “Ant colonies are.” A colony can solve problems unthinkable for individual ants, such as finding the shortest path to the best food source, allocating workers to different tasks, or defending a territory from neighbors. As individuals, ants might be tiny dummies, but as colonies they respond quickly and effectively to their environment. …

Asset allocation, 2. Diversification, 3. Tax efficiency.

Asset allocation is more than diversification. It means dividing up your money among different classes, or types, of investments (such as stocks, bonds, commodities, or real estate) and in specific proportions that you decide in advance, according to your goals or needs, risk tolerance, and stage of life.

You’ll learn more about this in chapter 4.1 on asset allocation, but for now, just know that if real estate’s mantra is “Location! Location! Location!” then the mantra for getting better returns while reducing risk is “Diversification! Diversification! Diversification!” Effective diversification not only reduces your risk but also offers you the opportunity to maximize your returns.

I do not bother with oversea holdings, nor am I concerned about asset or sector allocation - I am focused on particular stocks. Let me explain my reasons. If you're a manager of large institutional funds you'll usually aim for X% in the USA, Y% in South East Asia, Z% in Europe, etc., and similarly a certain percentage in banks and financial stocks, another in media, and yet another in healthcare, etc., and this is the right approach. But I believe that the private investor should forget about all this for their more modestly sized portfolios. I like UK-headquartered and quoted businesses which operate internationally anyway as they seek world markets for their products or services.

In the theory of classic disruption, established customers initially reject the inferior, good-enough offer, and hence create a liability for incumbents, for whom allocating resources to the disruptive offer meant going against the feedback of their best customers. This was the tension at the root of the dilemma in Clayton Christensen’s The Innovator’s Dilemma.3 In contrast, established customer relationships are an asset in introducing ecosystem disruption, as they open the door to credibility and ecosystem carryover

Table Of Contents Introduction The Problem With Contracts The Smart Solution Distinctive Properties What You Need to Know What Is A Smart Contract? Blockchain and Smart Contracts Vitalik Buterin On Smart Contracts Digital and Real-World Applications How Smart Contracts Work Smart Contracts' Historical Background A definition of Smart Contracts The promise What Do All Smart Contracts Have in Common? Elements Of Smart Contracts Characteristics of Smart Contracts Capabilities of Smart Contracts Life Cycle Of A Smart Contract Why Are Smart Contracts Important? How Do Smart Contracts Work? What Does Smart Contract Code Look Like In Practice? The Structure of a Smart Contract Interaction with Traditional Text Agreements Are Smart Contracts Enforceable? Challenges With the Widespread Adoption of Smart Contracts Non-Technical Parties: How Can They Negotiate, Draft, and Adjudicate Smart Contracts? Smart Contracts and the Reliance on “Off-chain” Resources What is the "Final" Agreement Reached by the Parties? The Automated Nature of Smart Contracts Are Smart Contracts Reversible? Smart Contract Modification and Termination The Difficulties of Integrating Specified Ambiguity Into Smart Contracts Do Smart Contracts Really Guarantee Payment? Allocation of Risk for Attacks and Failures Governing Law and Location Best Practices for Smart Contracts Types Of Smart Contracts A Technical Example of a Smart Contract Smart Contract Use-Cases Smart Contracts in Action Smart Contracts and Blockchains In the Automobile Industry Smart Contracts and Blockchains in Finance Smart Contracts and Blockchains In Governments Smart Contracts And Blockchains In Business Management Smart Contracts and Blockchains in Initial Coin Offerings (ICOs) Smart Contracts and Blockchains In Rights Management (Tokens) Smart Contracts And Blockchains In NFTs - Gaming Technology Smart Contracts and Blockchains in the Legal Industry Smart contracts and Blockchains in Real Estate Smart Contracts and Blockchains in Corporate Structures - Building DAOs Smart Contracts and Blockchains in Emerging Technology Smart Contracts and Blockchains In Insurance Companies Smart Contracts and Blockchains in Finance Smart Contracts And Blockchains In Powering DEFI Smart Contracts  and Blockchains In Healthcare Smart Contracts and Blockchains In Other Industries What Smart Contracts Can Give You How Are Smart Contracts Created? Make Your Very Own Smart Contract! Are Smart Contracts Secure?

Professional investment advisers are best at providing other valuable services, including asset allocation guidance, information on tax considerations, and advice on how much to save while you work and how much to spend when you retire. Further, most advisers are always there to consult with you about the financial markets.

Though part of the puzzle is obviously capital budget allocations, most companies seem to have a much higher awareness of the rules by which capital and assets are allocated than they do about how skilled people should be spending their time.

When playing a bear market, the same rules hold: You want to diversify your risks, especially knowing that collapses move even faster than rallies. You need to decide how much safe cash or near cash you want to hold to sleep at night and to handle financial emergencies, like the loss of your job or your house. Then decide how much to put into longer-term high-quality bonds, like those 30-year Treasuries and AAA corporates, but I think it’s still premature to make this move at the time of this writing, in August 2017. Then decide how much you want to put into a dollar bull fund or the ETF UUP, which tracks the U.S. dollar versus its six major trading partners. If you’re willing to risk part of your wealth, you can also bet on financial assets going down—from stocks to gold. Stocks are the one type of financial asset that goes down in either a deflationary crisis, like the 1930s, or an inflationary one, like the 1970s. So shorting stocks is the best way to prosper in the downturn, either way. But don’t leverage this bet. The markets are simply too volatile. You can short the stock market with no leverage by simply buying an ETF (exchange-traded fund) like the ProShares Short S&P 500 (NYSEArca: SH). It’s an inverse fund on the S&P 500, so if the index goes down 50 percent, you make 50 percent. The ProShares Ultrashort (NYSEArca: QID) is double short the NASDAQ 100, which is likely to get hit the worst. If you make this play, just do a half share, to avoid that two-times leverage (hold the other half in cash or short-term bonds). Direxion Daily Small Cap Bear 3X ETF (NYSEArca: TZA) is triple short the Russell 2000, which is also likely to lead on the way down. So buy only a one-third share of this one, to remain without leverage. (That means the money you allocate here should be one-third in TZA and two-thirds in cash, to offset the leverage.) And unlike the gold bugs, I see gold collapsing. It’s an inflation hedge, not a deflation hedge. If gold rallies back as high as $1,425—on my predicted bear-market rally—then it could easily drop to around $700 within a year. Your last decision is whether to risk some of your funds betting on gold’s downside, for the greatest potential returns. You can buy DB Gold Double Short ETN (NYSEArca: DZZ)—double short gold—at a half share, to offset the leverage, or just simply short GLD, the ETF that follows gold. There you have it. How to handle the coming crash.

Fidelity to asset-allocation targets requires regular purchase of the out-of-favor and sale of the in-favor, demanding that investors exhibit out-of-the-mainstream, contrarian behavior.

How Do We Know If We Need to Rebalance? We need to know several things in order to determine if our portfolio needs to be rebalanced. First, we need to know our desired asset allocation. This was determined when we first established our asset allocation plan, and possibly revised and refined it later as life cycles and events made changes to our plan necessary.

Create a simple, diversified asset allocation plan. Invest a part of each paycheck in low-cost, no-load index funds according to your plan. Check your investments periodically, rebalance when necessary, then stay the course.

First, he said, we need 30% in stocks (for instance, the S&P 500 or other indexes for further diversification in this basket). Initially that sounded low to me, but remember, stocks are three times more risky than bonds. And who am I to second-guess the Yoda of asset allocation!? “Then you need long-term government bonds. Fifteen percent in intermediate term [seven- to ten-year Treasuries] and forty percent in long-term bonds [20- to 25-year Treasuries].” “Why such a large percentage?” I asked. “Because this counters the volatility of the stocks.” I remembered quickly it’s about balancing risk, not the dollar amounts. And by going out to longer-term (duration) bonds, this allocation will bring a potential for higher returns. He rounded out the portfolio with 7.5% in gold and 7.5% in commodities. “You need to have a piece of that portfolio that will do well with accelerated inflation, so you would want a percentage in gold and commodities. These have high volatility. Because there are environments where rapid inflation can hurt both stocks and bonds.” Lastly, the portfolio must be rebalanced. Meaning, when one segment does well, you must sell a portion and reallocate back to the original allocation. This should be done at least annually, and, if done properly, it can actually increase the tax efficiency. This is part of the reason why I recommend having a fiduciary implement and manage this crucial, ongoing process.

A second method of rebalancing involves the creation of expansion bands. With this method of rebalancing, you create a window, such as plus or minus 5 percent from your desired allocation. You would rebalance whenever the asset class exceeds those bands. For example, if our desired equity allocation was 60 percent, we’d only need to rebalance whenever the equities in our portfolio fell below 55 percent or rose above 65 percent. However, if you plan to use the expansion band method and intend to rebalance as soon as your allocation touches either band, this would require more frequent monitoring of one’s portfolio than the predetermined time-interval method, especially in a volatile market. In addition, if strict expansion band rebalancing were to be done in a taxable account, it could create short-term capital gains which are taxed at a higher rate than long-term capital gains. Therefore, you may want to consider delaying your rebalancing until you have held the asset for more than 12 months.

The global financial crisis was caused by excesses of the liberal system of regulations and the belief that a completely free market will allow enormous innovation and allocate capital to the most profitable enterprises with the highest returns. Once the Federal Reserve Chairman decided it was not necessary to regulate derivatives and supervise them, the fuse was lit. Once you find that you can mash up a lot of good and bad assets in one bundle and pass on your risk all around Europe and other parts of the world, you have started something like a Ponzi scheme which must come to an end sometime…The business of a person in a financial institution is to make the biggest profit for himself, so just condemning the bankers and the profit takers does not make sense. You have allowed these rules, and they work within these rules.

if you consistently practice the techniques recommended in this book, you will automatically side-step most of the emotional investment traps. Pay off your credit card and high-interest debts and stay out of debt. Formulate a simple, sound, asset allocation plan and stick to it. Systematically save and invest a part of each paycheck in accordance with the asset allocation plan. The earlier you start, the richer you become. Invest most or all of your money in index funds. Keep your costs of investing and taxes low. Don’t try to time the market. Tune out the noise, rebalance your portfolio when necessary, and stick with your plan. By doing those things, you will intelligently manage risk. You will buy low, sell high, and have the power of compounding working in your favor. You will slowly but systematically build wealth and a nest egg for a comfortable retirement. With a little luck, you will have more money than you dreamed you would ever have. These time-tested techniques have worked for millions of other people and they can work for you, too.