Asset Allocation: Balancing Financial Risk

Overview

Financial experts agree: Asset allocation is the key strategies for maintaining a consistent yet superior rate of investment return. Now, Roger Gibson's Asset Allocation - the bestselling reference book on this popular subject for a decade has been updated to keep pace with the latest developments and findings. This Third Edition provides step-by-step strategies for implementing asset allocation in a high return/low risk portfolio, educating financial planning clients on the ...
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Overview

Financial experts agree: Asset allocation is the key strategies for maintaining a consistent yet superior rate of investment return. Now, Roger Gibson's Asset Allocation - the bestselling reference book on this popular subject for a decade has been updated to keep pace with the latest developments and findings. This Third Edition provides step-by-step strategies for implementing asset allocation in a high return/low risk portfolio, educating financial planning clients on the solid logic behind asset allocation, and more.

Roger Gibson, Charted Financial Analyst (CFA) and Certified Financial Planner (CFP) is President of Gibson Capital Management, Ltd. located in Pittsburgh, Pennsylvania. The firm is a Registered Investment Adviser providing money management services for high net worth individuals and institutional clients nationwide. Gibson is internationally recognized as an expert in asset allocation and investment portfolio design. He is a frequent speaker at national educational conferences sponsored by such organizations as the American Law Institute-American Bar Association, The American Institute of Certified Public Accountants, The International Association for Financial Planning, the Institute of Certified Financial Planners, and the National Endowment for Financial Education. He also serves on the Advisory Board and is a regular columnist on asset allocation for the Journal of Retirement Planning and is a member of the Editorial Advisory Board of the Journal of Financial Planning. He is frequently interviewed by financial publications, including The Wall Street Journal, Forbes, Money, Fortune, The New York Times, and U.S. News and World Report.

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: 9781556231643
  • Publisher: McGraw-Hill School Education Group
  • Publication date: 10/20/1989
  • Pages: 220

Meet the Author

Roger Gibson, Charted Financial Analyst (CFA) and Certified Financial Planner (CFP) is President of Gibson Capital Management, Ltd. located in Pittsburgh, Pennsylvania. The firm is a Registered Investment Adviser providing money management services for high net worth individuals and institutional clients nationwide. Gibson is internationally recognized as an expert in asset allocation and investment portfolio design. He is a frequent speaker at national educational conferences sponsored by such organizations as the American Law Institute-American Bar Association, The American Institute of Certified Public Accountants, The International Association for Financial Planning, the Institute of Certified Financial Planners, and the National Endowment for Financial Education. He also serves on the Advisory Board and is a regular columnist on asset allocation for the Journal of Retirement Planning and is a member of the Editorial Advisory Board of the Journal of Financial Planning. He is frequently interviewed by financial publications, including The Wall Street Journal, Forbes, Money, Fortune, The New York Times, and U.S. News and World Report.
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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

Acknowledgments
Foreword
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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