Multi-asset class investing can increase returns with less risk. These are the details you need to know about asset allocation!

#AssetAllocation #InvestmentPortfolio

--- Asset Allocation Books
All About Asset Allocation: https://amzn.to/3oarULI
Asset Allocation: Balancing Financial Risk - https://amzn.to/32FXWYi
Rational Expectations: Asset Allocation for Investing Adults - https://amzn.to/3g8pcBZ

--- Follow up Videos:
Tax-Efficient Asset Allocation [5 Steps to Avoid Taxes]    • Tax-Efficient Asset Allocation [5 Ste...  
Three-Fund Portfolio [The BEST Portfolio!]    • Three-Fund Portfolio [The BEST Portfo...  
Investment Risk Tolerance Explained:    • Investment Risk Tolerance Explained [...  

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-- Outline
00:00 The Importance of Asset Allocation
Asset allocation is the most important factor in your portfolio returns. Research shows it explains 80-90% of portfolio returns. It is far more important than market timing and securities selection (ie: stock picking).
* Determinants of Portfolio Performance II: An Update - Brinson, Singer, Beebower: https://indexacapital.com/bundles/una...
* The global case for strategic asset allocation and an examination of home country bias: Scott, Balsamo, McShane, Tasopoulos: https://personal.vanguard.com/pdf/ISG...

01:22 Goal of Investing and Asset Allocation
Asset allocation is about estimating the risk and return tradeoffs of your portfolio.

02:00 Asset Allocation and Risk
Increased returns generally requires increased risk. As you increase risk, you may be decreasing the chances of meeting your investment goals.

03:07 Modern Portfolio Theory
By applying modern portfolio theory, we can possibly construct portfolios that deliver a higher return with the same amount of risk or the same return with less risk. This is critical to increasing the odds of achieving your financial goals.

04:33 Rebalancing
We look at a hypothetical investment to see how rebalancing can increase returns and lower volatility.

06:32 Correlation
We discuss correlation and how rebalancing is most effective with less correlated assets. We look at four hypothetical investments with various correlations, and how returns and standard deviation change when diversifying across a couple of these investments. We also look at a correlation matrix to see how various asset classes were correlated from ~2015-2020.

Correlation Matrix Source: https://www.vanguardinvestor.co.uk/ar...

Note that correlations do not stay constant over time. They are constantly changing, sometimes in very surprising ways.

10:38 Efficient Frontier
Portfolio construction isn’t an exact science. There is no guarantee the future will look like the past. However, it’s still useful to study historical asset class correlations and their effect on portfolio composition. The efficient frontier is a very useful tool for this purpose.

13:56 Key Takeaways
The key takeaway is that by combining multiple asset classes in your portfolio and rebalancing annually, you can possibly improve the risk adjusted return of your portfolio. This works best with assets that are less correlated, and doesn’t really provide any benefit for highly correlated asset classes. If you just want the highest return possible, multi-asset class investing may not be for you. However, if you want to be more conservative and calculated about your risks, it is very powerful.

15:09 Asset Classes and Portfolio Construction
I briefly discuss my opinion on asset classes to include in a portfolio.

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Disclaimer: I am not a financial advisor. My videos are for educational purposes and are my opinions. You should seek advice from a professional advisor or perform your own research. There is no guarantee you will be successful following my opinions.