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Capturing Average Returns With Asset Allocation, Part II

Summary:
In a recent post I reviewed how asset allocation is a reliable tool for earning average to above-average returns (with average or below-average risk) for a given opportunity set. Let’s extend the concept with a real-world test of three more market slices: US fixed income, US equity sectors and US equity risk factors. First up is fixed income, based on this set of bond ETFs to proxy a wide sample of US fixed income. For the test period we’ll look at the trailing five-year window. Once again, the value of allocating assets (using equal weights that are rebalanced every Dec. 31) is clear. In particular, notice that the equal-weighted mix is relatively stable and delivers roughly average results.     For equity sector ETFs, I used this fund set. Here, too, we see a familiar

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In a recent post I reviewed how asset allocation is a reliable tool for earning average to above-average returns (with average or below-average risk) for a given opportunity set. Let’s extend the concept with a real-world test of three more market slices: US fixed income, US equity sectors and US equity risk factors.

First up is fixed income, based on this set of bond ETFs to proxy a wide sample of US fixed income. For the test period we’ll look at the trailing five-year window. Once again, the value of allocating assets (using equal weights that are rebalanced every Dec. 31) is clear. In particular, notice that the equal-weighted mix is relatively stable and delivers roughly average results.    

Capturing Average Returns With Asset Allocation, Part II

For equity sector ETFs, I used this fund set. Here, too, we see a familiar outcome: average results.

Capturing Average Returns With Asset Allocation, Part II

Next, here’s the equity factor test, based on a broad set of representative ETFs.

Capturing Average Returns With Asset Allocation, Part II

The common theme: asset allocation across a representative set of funds within a given markets space delivers a dependable strategy for earning average-to-above-average performance while keeping risk under control, typically at an average level if not below average.

The relatively consistent return and risk-management outcomes of holding everything and equal weighting (or cap weighting) lays a foundation for enhancing the results further by adding, say, a momentum overlay for adjusting weights tactically with an eye on juicing return a bit and/or lowering risk.

In an upcoming post I’ll look at some of the possibilities.


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By James Picerno


James Picerno
James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers. Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg Markets, Mutual Funds, Modern Maturity, Investment Advisor, Reuters, and his popular finance blog, The CapitalSpectator.

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