Just as the secret of real estate is location, location, location, the real secret to Yale’s remarkable continuing success is defense, defense, defense.
The best part of a good defense is, of course, avoiding major error, but the disciplined removal of small errors through rigorous thinking and attention to detail can accumulate beneficially too. (查看原文)
Institutions versus Individuals
I erred in describing my target audiences.In fact, I have come to believe that the most important distinction in the investment world does not separate individuals and institutions; the most important distinction divides those investors with the ability to make high quality active management decisions from those investors without active management expertise. (查看原文)
The knowledge base that provides useful support for investment decisions knows no bounds. A rich understanding of human psychology, a reasonable appreciation of financial theory, a deep awareness of history, and a broad exposure to current events all contribute to development of well-informed portfolio strategies. Many top-notch practitioners confess they would work without pay in the endlessly fascinating money management business. (查看原文)
For example, asset allocation relies on a combination of top-down assessment of asset class characteristics and bottom-up evaluation of asset class opportunities. Since quantitative projections of returns, risks, and correlations describe only part of the scene, top-notch investors supplement the statistical overview with a ground-level understanding of specific investments. Because bottom-up insights into investment opportunity provide information important to assessing asset class attractiveness, effective investors consider both top-down and bottom-up factors when evaluating portfolio alternatives. (查看原文)
The first theme centers on the importance of taking actions within the context of an analytically rigorous framework, implemented with discipline and under-girded with thorough analysis of specific opportunities. (查看原文)
Asset allocation, the starting point for portfolio construction, involves defining the asset classes that constitute the portfolio and determining the proportion of the fund that resides in each class. (查看原文)
Instead of passively accepting the overwhelming importance of asset allocation, knowledgeable investors consider each source of return as a significant independent factor.
The principles of equity ownership and diversification underlie asset allocation deliberations of serious long-term investors. Both historical experience and finance theory point to the conclusion that owning equities provides higher returns than owning bonds.
If the market timer’s enhanced risk gives fiduciaries pause, then prudence demands rejecting even temporary moves to increase risk. Serious investors avoid timing markets
The degree of active management opportunity in various asset classes provides important input into the portfolio management process. Emphasizing inefficiently priced asset classes with interesting... (查看原文)
Studies of long-term returns in the United States ignore the fact that investors in foreign markets experienced less favorable outcomes, with sometimes dramatically worse results.
One study suggests that “…the 5 percent real capital appreciation return on U.S. stocks is exceptional, as other markets have typically returned 3 percent less than U.S. equities.” (查看原文)
Although on an asset-specific basis, higher expected returns apparently come with the price of higher expected volatility, the lack of correlation between individually risky asset classes actually reduces overall portfolio risk. Diversification represents “a free lunch” that allows investors to reduce risk without sacrificing expected returns. (查看原文)
Market timing, defined as a short-term bet against long-term policy targets, requires being right in the short run about factors that are impossible to predict in the short run. Yet investors can reasonably deal with the important drivers of returns in the long run as short-term anomalies disappear into predictable long-term patterns. Sensible investors avoid concentrated bets against the institution’s adopted asset allocation, thereby eliminating the risk of inflicting serious damage by holding a portfolio inconsistent with long-term objectives.
Market timing explicitly moves the portfolio away from longterm policy targets, exposing the institution to avoidable risks. Because policy asset allocation provides the central means through which investors express return and risk preferences, se... (查看原文)
