Asset allocation is often referred to as "a free lunch". Why? If one only uses stocks and bonds as asset class examples, where is this "free lunch"? Stocks have significantly outperformed bonds in the long term(>20 years). Even more so in REAL terms. Any allocation of capital to bonds will therefore reduce returns. Adding bonds may certainly reduce VOLATILITY, but surely reduces ones REWARD in the long term. Risk/reward to me means the loss/gain of capital from Point A to Point B, while volatility is what happens in between A and B. The former is surely more important to the long term investor. Am I missing something? (I do not have access to the above article, just wanted to discuss asset allocation in general).
Have I lost the plot here or is Stuart advocating against every course and book I have ever read! Even with a buy and hold strategy, why in the world would you want to sell your performing shares to buy a non-performing share??? In his own course he drums it into us not to catch falling knives!!!
Asset Allocation refers more to Asset Classes, than individual shares. In essence you are taking a a structure that has x variance in return, in order to maintain x you need to maintain the same weights. Trading winners and losers comes into TAA not SAA. Think of it this way, I want 50% equity, 20% Property and 30% Bonds because the historical standard deviation in monthly return on this mix is 3% which is where I foresee my risk. In order to maintain that 3% avg, I need to keep my weights at 50/20/30.