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How Portfolio Allocation Strategies have evolved

 Portfolio allocation strategy has gone back as far as 1200 BC in writings of Talmud and has continue to evolved in the 1900s.  Below are 4 major strategies where the arrows show influence.


portfolio allocation strategy

Talmud Strategy

"Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve." - Talmud (as early as 1200 BC)

(Stocks, REITs, Bonds) 

 

Modern Portfolio Theory

Harry Markowitz developed the mean variance portfolio that incorporated expected return, expected standard deviation and expected correlation.  These lead to the creation of the popular 60/40 portfolio of stocks and bonds where risk averse investors can construct portfolios that maximize return while minimizing risk.

Permanent Portfolio

Harry Browne developed a strategy to have financial safety, no matter what the future brings.  He then invested based on 4 possible parts of the economic cycle:
  • Prosperity -> stocks
  • Deflation -> long term bonds
  • Recession / tight money -> cash
  • Inflation -> precious metals (gold)  
https://en.wikipedia.org/wiki/Fail-Safe_Investing 
 

All Weather

Ray Dalio developed the strategy with similar mindset to Harry Browne stipulating the future is unpredictable so create 4 portfolios for the possible environments each with the same risk.
  • Inflation rising (IL Bonds, Commodities, EM Credit)
  • Inflation falling (Equities, Nominal Bonds)
  • Growth rising (Equities, Commodities, Corporate Credit, EM Credit)
  • Growth failing expectations (Nominal Bonds, IL Bonds)

Some key differentiators in the implementation of All Weather

  • assets reflect more modern instruments
  • allocation is by risk, so leverage can be used if the portfolio risk is too low

https://www.bridgewater.com/research-and-insights/the-all-weather-story 

Takeaways

All the strategies seem very reasonable for long term tradition investors.  However; none of these strategies include more modern financial instruments like futures, options, and crypto currencies which can open up a whole new set of tools for investors to customize their portfolio needs.



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