Asset Allocation, 4th Ed

Asset Allocation, 4th Ed

by Roger C. Gibson
     
 

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Roger C. Gibson's investing classic -Updated with lessons from the most recent bear market

It took the bear market of 2000-2002 to bring the wisdom of asset allocation back to the public's attention. Asset allocation can not only reduce risk, it can increase returns as well. In the Fourth Edition of Asset Allocation: Balancing Financial Risk

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Overview

Roger C. Gibson's investing classic -Updated with lessons from the most recent bear market

It took the bear market of 2000-2002 to bring the wisdom of asset allocation back to the public's attention. Asset allocation can not only reduce risk, it can increase returns as well. In the Fourth Edition of Asset Allocation: Balancing Financial Risk, Roger C. Gibson compiles new data that strengthens the case for the multiple-asset-class investing strategy that he has advocated since his landmark work was first published in 1990. Gibson's work unites theory and practice, the art and the science of asset allocation.

Praise for Asset Allocation, Fourth Edition

“Roger Gibson presents a balanced, professional view of the investment process.”

-Harry Markowitz, 1990 Nobel Laureate

“Asset Allocation is the best overall piece of work I've seen.”

-Gary Brinson, Chairman, Brinson Partners, and past Chairman, The Institute of Chartered Financial Analysts

“If all investment advisors would read Asset Allocation, clients would be far better off.”

-Darwin Bayston, President, Bayston Capital Management, and past president and CEO, The Association for Investment Management Research

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Product Details

ISBN-13:
9780071593908
Publisher:
McGraw-Hill Education
Publication date:
12/20/2007
Sold by:
Barnes & Noble
Format:
NOOK Book
Pages:
336
File size:
11 MB
Note:
This product may take a few minutes to download.

Meet the Author

Roger C. Gibson, CFA, CFP, is Chief Investment Officer of Gibson Capital Management, Ltd. (www.gibsoncapital.com), which advises high net worth individuals and institutional clients nationwide. An internationally recognized expert in asset allocation and investment portfolio design, Gibson speaks at conferences for financial professionals around the world and is quoted frequently in national media. He lives with his wife and business partner, Brenda, in a pre-Civil War farmhouse north of Pittsburgh, Pennsylvania.

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Chapter 1: The Importance of Asset Allocation

The capital markets have changed dramatically over the last few decades. Money management has undergone a concurrent evolution. In the early 1960s the term asset allocation did not exist. The traditional view of diversification was simply to "avoid putting all of your eggs in one basket." The argument was that if all of your money was placed in one investment, your range of possible outcomes was very wide-you might win very big, but you also had the possibility of losing very big. Alternatively, if you spread your money among a number of different investments, the likelihood was that you would not be either right on all of them or wrong on all of them at the same time. There was an advantage, therefore, in having a narrower range of outcomes.

For the individual investor those were the days when broad diversification meant owning several dozen stocks and bonds along with some cash equivalents. For pension plans and other institutional portfolios, the same asset classes were often used in a balanced fund with a single manager. Because the U.S. stock and bond markets constituted the major portion of the world capital markets, most investors did not even consider international investing. Bonds traded in a very narrow price range. Security analysis focused more on common stocks, where the payoff seemed greatest for superior investment skill. The majority of transactions on capital market exchanges were noninstitutional, and so it was commonly believed that a full-time, skilled professional should be able to consistently "beat the market." The investment manager's job was to add value through successful market timing and/orsuperior security selection. The focus was much more on individual securities than on the total portfolio. The "prudent man rule," with its emphasis on individual assets, reinforced this type of thinking in the fiduciary community.

Time passed, and bonds moved out of their narrow trading ranges as price volatility increased dramatically due to large swings in interest rates. Multiple managers on both the fixedincome and equity portions of institutional portfolios replaced the single balanced manager approach. Institutional trading on the exchanges increased to more than 80 percent of all activity. The full-time professionals were no longer competing against amateurs. They were now competing against each other.

Imagine for a moment the floor of the New York Stock Exchange. Millions of transactions are occurring between willing buyers and sellers. Around any single transaction, the buyer has concluded that the security is worth more than the money, while the seller has concluded that the money is worth more than the security. Both parties to the transactions are likely to be institutions that have nearly instantaneous access to all publicly available relevant information concerning the value of the security. Each has very talented, well-educated investment analysts who have carefully evaluated this information and have interestingly reached opposite conclusions. At the moment of the trade, both parties are acting from a position of informed conviction, even though time will prove one of them right and the other one wrong. Because of the dynamics of a free market, their transaction price equates supply with demand for the security and thereby clears the market. A free market price is therefore a consensus of a security's intrinsic value.

In the money management business, the stakes are high and the rewards are correspondingly great for successful money managers who are able to produce a consistently superior return. It is no wonder that so many bright, talented people are drawn to the profession...

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