Asset Allocation, 4th Ed / Edition 4

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The definitive guidebook for successful long-term investing

The third edition of Roger C. Gibson's Asset Allocation: Balancing Financial Risk was released in 2000 on the heels of the biggest bull market in a century and amidst talk of a new economy. The bear market that followed was the worst since 1973-1974 and resulted in the destruction of roughly half of the stock market's value. Through it all, Roger Gibson's advice to investors remained the same.

Gibson once again offers techniques to design all-weather portfolios that improve long-term performance, while mitigating overall risks through widely varying market environments.

Grounded in the principles of modern portfolio theory, this fourth edition of his investing classic explains how and why asset allocation works. Gibson demonstrates how adding new asset classes to a portfolio improves its risk-adjusted returns and how strategic asset allocation uses, rather than fights, the forces of capital markets to achieve investment success.

Gibson also addresses the practical side of investing, advocating an approach based on a disciplined execution of the fundamentals—the most important things that investment professionals and lay investors need to focus on to achieve their financial goals. With more than two decades of experience managing clients' portfolios and expectations, he underscores the importance of identifying and working through the emotional and psychological traps that can impede investment success. In this new edition, Gibson offers his proven guidance on multiple-asset-class investing with updated exhibits and research. New topics include:

  • A review of the 2000-2002 stock bear market in the context of bull and bear markets over the last 100 years
  • An expanded discussion of the dangers of market timing
  • Non-traditional asset classes such as real estate securities, commodity-linked securities, and TIPS in a diversified portfolio
  • The challenges of “frame-of-reference” risk—the most significant danger confronting the multiple-asset-class investor
  • The role of Monte Carlo simulation in retirement planning

This classic resource has been revised and updated to reflect the latest data affecting asset allocation. Noted expert, Roger Gibson, provides a thorough review of the capital market theory behind asset allocation, plus step-by-step guidelines for designing and implementing appropriate investment strategies.

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Product Details

  • ISBN-13: 9780071478090
  • Publisher: McGraw-Hill Professional Publishing
  • Publication date: 12/20/2007
  • Edition number: 4
  • Pages: 336
  • Sales rank: 1,069,959
  • Product dimensions: 6.40 (w) x 9.30 (h) x 1.09 (d)

Meet the Author

Roger C. Gibson, CFA, CFP, is Chief Investment Officer of Gibson Capital Management, Ltd. (, 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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Read an Excerpt

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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Table of Contents

Introduction 1
Ch. 1 The Importance of Asset Allocation 4
Ch. 2 Historical Review of Capital Market Investment Performance 18
Ch. 3 Comparative Relationships among Capital Market Investment Alternatives 52
Ch. 4 Market Timing 71
Ch. 5 Time Horizon 80
Ch. 6 A Model for Determining Broad Portfolio Balance 94
Ch. 7 Diversification: The Third Dimension 115
Appendix: A More Detailed Discussion of Diversification Concepts 131
Ch. 8 Traditional Portfolios versus More Broadly Diversified Approaches 142
Ch. 9 Portfolio Optimization 169
Ch. 10 Know Your Client 188
Ch. 11 Managing Client Expectations 199
Ch. 12 Money Management 213
Ch. 13 Resolving Problems Encountered During Implementation 242
Conclusion 250
Index 255
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