This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook. If you promise to write a review, go here and I’ll send you a free copy. It is also available as a printable PDF on Gumroad. To celebrate the launch of the new book, my last two ebooks (Global Value and Shareholder Yield) are free on Amazon for five days ending March 6th …
To help put the reader in the right mindset for this book, let’s run a little experiment. We want to make sure you’re paying attention, so turn off the TV, close your email, and grab a cup of coffee.
Below is a test. It is simple, but requires your utmost concentration. Here is a video for you to watch. So click on this link and then come back to this book after watching – it’s only about 20 seconds long so we’ll wait.
Did you watch?
Okay, do you have your number? If you do your job correctly, you learn that the ball is passed 15 times. Did you get the number correct? Congratulations!
But, of course, that’s not the whole story.
In this particular experiment, which many of you have probably seen already, while you were fastidiously counting basketball passes, what you might have missed was someone dressed in a gorilla costume walk into the frame, pound his chest, and walk off. Don’t feel bad – most participants in the experiment don’t notice the gorilla at all. While they kept their eye trained on what they assumed to be the most important task—the passing of the basketball—they simply failed to notice anything else.
Go back and watch again and be amazed that you would have missed this very obvious intruder. What the research actually finds is that when we narrow our focus to one specific task, we tend to overlook other, significant events.
What does this have to do with investing and this book? Conventional wisdom tells us that, as investors, we have to keep our eyes trained on our asset allocation. However, how much time do you spend thinking about the following questions:
“Is it the right time to be in stocks, or should I sell?”
“Should I add gold to my portfolio? If so, how much?”
“Aren’t bonds in a bubble?”
“How much should I put in foreign stocks?”
“Are central banks manipulating the market?”
With all of our focus on assets – and how much and when to allocate them – are we missing the gorilla in the room?
Our book begins by reviewing the historical performance record of popular assets like stocks, bonds, and cash. We look at the impact inflation has on our money. We then start to examine how diversification through combining assets, in this case a simple stock and bond mix, works to mitigate the extreme drawdowns of risky asset classes.
But we go beyond a limited stock/bond portfolio to consider a more global allocation that also takes into account real assets. We track 13 assets and their returns since 1973, with particular attention to a number of well-known portfolios, like Ray Dalio’s All Weather portfolio, the Endowment portfolio, Warren Buffett’s suggestion, and others. And what we find is that, with a few notable exceptions, many of the allocations have similar exposures.
And yet, while we are all busy paying close attention to our portfolio’s particular allocation of assets, the greatest impact on our portfolios may be something we fail to notice altogether. In this case, the so-called “gorilla” are the fees that we often fail to consider. In one shocking example, we find that the best performing strategy underperforms the worst strategy when we tack on advisory fees. Ultimately, smart investing requires that we not only monitor asset allocation, but of equal weight, we focus on the advisory fees associated with the investment strategy.