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Capturing Average Returns With Asset Allocation

By James PicernoMarket OverviewApr 15, 2021 03:53PM ET
www.investing.com/analysis/capturing-average-returns-with-asset-allocation-200573216
Capturing Average Returns With Asset Allocation
By James Picerno   |  Apr 15, 2021 03:53PM ET
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In a recent post I reviewed how asset allocation is a reliable tool for earning average to above-average returns (with average or below-average risk) for a given opportunity set. Let’s extend the concept with a real-world test of three more market slices: US fixed income, US equity sectors and US equity risk factors.

First up is fixed income, based on this set of bond ETFs to proxy a wide sample of US fixed income. For the test period we’ll look at the trailing five-year window. Once again, the value of allocating assets (using equal weights that are rebalanced every Dec. 31) is clear. In particular, notice that the equal-weighted mix is relatively stable and delivers roughly average results.

Fixed Income Wealth Indexes Daily Chart
Indexes Daily Chart

For equity sector ETFs, I used this fund set. Here, too, we see a familiar outcome: average results.

Equity Sector Wealth Indexes Daily Chart
Indexes Daily Chart

Next, here’s the equity factor test, based on a broad set of representative ETFs.

Equity Factor Wealth Indexes Daily Chart
Indexes Daily Chart

The common theme: asset allocation across a representative set of funds within a given markets space delivers a dependable strategy for earning average-to-above-average performance while keeping risk under control, typically at an average level if not below average.

The relatively consistent return and risk-management outcomes of holding everything and equal weighting (or cap weighting) lays a foundation for enhancing the results further by adding, say, a momentum overlay for adjusting weights tactically with an eye on juicing return a bit and/or lowering risk.

In an upcoming post I’ll look at some of the possibilities.

Capturing Average Returns With Asset Allocation
 

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Capturing Average Returns With Asset Allocation

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Comments (1)
John Swiecki
John Swiecki Apr 15, 2021 10:26PM ET
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Sounds nice and boring. I can’t wait to see the upcoming post.
 
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