The Intelligent Asset Allocator | William Bernstein

the intelligent asset allocator

Summary of the Intelligent Asset Allocator

The Intelligent Asset Allocator tackles the issue of how to build a modern investment portfolio to maximise returns and minimise your exposure to risk. Bernstein explains the principles of Asset Allocation or Modern portfolio theory and how it can be used to reduce volatility without compromising on long term investment returns.

What is the Intelligent Asset Allocator about in a bit more detail

Several key concepts of modern portfolio theory are discussed, such as the market cycle and performance of various asset classes over time. Possibly the most important strategy discussed in modern portfolio theory is that of Diversification of your assets, including diversification into non correlated classes, and re-balancing this portfolio at set time-periods. This effectively means you sell your highest performing investments, and then invest the profits back into your lowest performing investments and then repeat the cycle.

Bernstein outlines that Bonds and Stocks often tend to move in opposite directions in price over time. During a declining market when people become fearful of stocks and sell them to flood into fixed interest, the face value of those bond coupons may rise as the masses chase the safety of a guaranteed return. This means the bonds could perform better than stocks in the short term. There are many other factors at play here also, such as interest rates which influence the price of all assets.

Risk is always difficult to quantify. Bernstein recommends purchasing some Bonds (fixed interest) in order to reduce volatility of a purely stock portfolio as a risk management measure. The general idea being at some point you need money and will have to sell a portion of your portfolio; if you do this and sell your stocks during a market crash you might make a loss. However if you had bonds and they had gone up in value, then you can sell those instead and even invest the surplus back into stocks which are currently on sale.

Modern portfolio theory teaches that as an investor gets closer to retirement, their investment time frame is reduced and they should become increasingly conservative over time. this means increasing their percentage of bonds, cash and fixed interest to reduce their overall level of ‘risk’. For the average investor, Bernstein recommends 10% bonds.

Why the Intelligent Asset Allocator is applicable to Financial Independence

Those of us on the path to Financial Independence are either aware of, or want to learn about, some of the intricacies of financial markets and asset allocation. This book is a fantastic way to expand your knowledge and explore the topic.

Of course, no one can predict the market, and everyone’s individual requirements are so personal and unique. Bernstein suggested portfolio allocation might work for the average person, but a system that works for one person may not work for another….

For those of us on the path to FIRE, we recognise that the performance of Stocks is traditionally much higher than bonds when averaged over the long term, and most aren’t fussed about volatility or the perceived safety of bonds since our time frame is often 60+ years. Instead we almost all unanimously invest in low cost stock ETFs and adopt a low cost of living and emergency fund as our risk management strategy instead.

The Captains big takeaways

  • High returns (reward) require high risk
  • Diversify your investments (aka total stock market index fund ETFs)
  • Try to invest in several non correlated asset classes (i.e. property and shares)
  • Decide whether volatility bothers you, and if so explore bond index funds – a simple rule is use your age as the percentage of your portfolio that can be bonds
  • Re-balance your portfolio at set time intervals to sell off your best performing assets and reinvest into your worst performing assets.
  • Try not to sell assets that have gone down in value

Where to buy the Intelligent Asset Allocator

You can buy a copy of Bernstein’s classic finance guide in most good bookstores. However, its pretty easy to just grab a copy online.

Check it out on Amazon here, listen to it through Audible or buy it from Australia’s local bookstore Booktopia

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