Developing Asset Allocation Models

If you think and act differently from the rest of the population, and you’re more correct than they are, you’ll be able to perform better than your peers.

It’s difficult to predict the future when there is so much ambiguity.

The greatest way to be a decision maker in this type of setting is not to demand clarity.

Determine what influences our decision-making process before we can make better ones.

It is governed by the following factors: inadequate information and probability.

Data is used to build a model and make financial decisions. Such as valuations (P/E) and inflation expectations.

If there is a lot of data, it can cause people to assume that they have all the information they need.

In today’s world, there is so much data available that it’s easy for people to fall prey to confirmation bias.

The more data you have, the more confident you feel, but this does not necessarily mean that you are better.

Being overly confident isn’t the only problem with being overly confident. Analysis paralysis (also known as “decision aversion”) is an equally harmful side effect of data overload.

It is important to know why your plan is best suited for the upcoming year in order to forecast.

Emotion can be removed from the equation and approach in this way.

The problem is that you don’t know what will happen next.

This or any other market, for that matter, does not have a “correct” solution, and you must accept this.

It’s more important to be able to flourish in the face of a wide range of possible outcomes than it is to be able to correctly answer a question.

The full benefits of compounding can only be experienced after a long period of time.

You must recognize that you will never fully grasp what causes market movements.

People who don’t overextend themselves usually fare well during a financial crisis.

One Asset Allocation Approach

Link to paper