Indexing, Rebalancing and Asset Allocation
James Picerno submits: SmartMoney asks: Is your index fund broken? Good question, although here’s a better one: Is your management of asset allocation broken? The SmartMoney story reviews an increasingly popular subject: alternative indexing methodologies. At issue is whether there’s a better way to index and earn a higher risk-adjusted return. There is, or so the article and a number of studies in recent years advise. Perhaps, although a more-productive question is how all this affects asset allocation? Yes, superior index products will improve asset allocation results, but we should be cautious before rushing to judgment. The broader your asset allocation, the less critical the choice of any given index, assuming we’re talking of broadly diversified funds that seek to capture the lion’s share of a given beta. Getting caught up in the indexing debate about this or that benchmark is worthwhile - up to a point. But keep in mind that all the alternative indexing methodologies share a common factor: rebalancing. One of the reasons that a given alternative benchmark beats its cap-weighted in recent years is linked with rebalancing. There’s a healthy debate about how to rebalance, and when, and there always will be. The broad lesson that flows from academic research in recent decades, which I summarize in my book Dynamic Asset Allocation
, is that opportunistically managing the asset mix is at the heart of beating the market-value-weighted benchmark of those components. True for an individual market, such as U.S. equities, and true for a multi-asset class portfolio. ButComplete Story »
- Original article
- Login or register to post comments
