Tecnico

NOTES: The Intelligent Asset Allocator by William Bernstein
Preface / Introduction: • Your asset allocation policy is 10 times more important than stock picking and market timing combined in the long run and it is the only aspect of your portfolio you can directly control

Chapter 1: General Considerations: • • Look at annualized return – it will always be less than the average return and isbetter indicator Common Standard Deviations (SD – the ‘swing’, scatter, or tolerance of a number’s target). This means that 66% of the time the number’s actual value will be between 1 SD above or 1 SD below target: o Money Market (Cash): 2%-3% o Bonds: Short-term: 3%-5% o Bonds: Long-term: 6%-8% o Domestic Stocks: Conservative: 10%-14% o Domestic Stocks: Aggressive: 15%-25% o Foreign Stocks:15%-25% o Emerging Markets Stocks: 25%-35% If you or your broker are not familiar with the SD of your investments… GET SOME LEARNING!

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Chapter 2: Risk and Return: • • At least 20-30 years of data are needed to get a decent grasp on returns; good ideas can be had by monthly data for 5-10 years. Approximate *annualized* returns and SD’s for major asset classes from 1926 to 1998: Asset Class ReturnSD______ o 30-day T-Bills: 3.77% 3.22% o 5-Year Treasuries: 5.31% 5.71% o 20-Year Treasuries: 5.34% 9.21% o Large Cap Stocks: 11.22% 20.26% o Small Cap Stocks: 12.18% 38.09% Nonsystematic Risk: the part of the risk that disappears with diversification Systematic Risk: the part of the risk that stays and cannot be diversified away Stocks are to be held for the long term – there are NO periods ofreturn less than 8% for any 30year period (data stopped at 2000)

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Chapter 3: The Behavior of Multiple-Asset Portfolios • • Dividing your portfolio between assets with uncorrelated results increases return while decreasing risk – the lower the correlation the better (Excel has a CORREL function, too) Policy Asset Allocation – the ‘rules’ or ‘template’ you planned for your investments. Thisis the baseline you reference for all decision. E.g. is it 40% Bonds/60% stocks with Bonds and then how are those numbers broken up? What % to Large cap US stocks? Foreign? Etc. Rebalancing your portfolio increases long-term return while reducing risk – an unbalanced portfolio will eventually become an all-stock portfolio. Rebalancing means re-allocating your current balances to match your PolicyAsset Allocation An all BOND portfolio is actually more risky (with less returns) than a portfolio that owns SOME stocks. Risk vs. reward must be planned out but all portfolios MUST own some stocks. Sticking to your Policy Asset Allocation through thick and thin is much more important that the “perfect” allocation
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NOTES: The IntelligentAsset Allocator by William Bernstein
Chapter 4: The Behavior of Real-World Portfolios • • • • • Bonds of maturities from 6 months to 5 years are good choices for portfolio risk-dilution The essence of effective portfolio construction is using large numbers of poorly correlated assets Foreign stocks belong in everyone’s portfolio “Something everyone knows isn’t worth knowing.” –Bernard Baruch. Stayaway from gimmicks and flavor of the year investing strategies No one knows where the efficient frontier is, but all seek it lowest SD w/ greatest return

Chapter 5: Optimal Asset Allocations • • Distrust of market sentiment and “expert opinion” is a VERY useful tool. Asset allocation approach: o How many different asset classes do I want to own? o How “conventional” a portfolio do I want? o Howmuch risk do I want to take? A level-one “vanilla” asset allocation: o US Large Stocks (S&P 500) o US Small Stocks (Russell 3000) o Foreign Stocks (EAFE) o US Short/Intermediate-term Bonds 3 Dimensions of Stock characterization: (1) nationality, (2) size, and (3) value vs. growth Consider a maximum of 75% Stock for the most aggressive investors and down to 25% for the least aggressive investors...