Author: Tom Yorke, Oceanic Capital Management
Covestor models: Global Diversified Conservative, Global Diversified Aggressive and Global Diversified Moderate
The single most important lesson I have learned in the last 25 years is that proper asset allocation is the most important factor to consider when constructing a portfolio and targeting specific long term returns.
This approach embraces modern portfolio theory as developed by Nobel Laureate Harry Markowitz and has been a key component of some of the most well known college endowment fund managers globally, most notably David Swensen, Yale University’s chief investment officer.
With proper diversification, risk and reward are in balance and correlations among asset classes are minimized. This is sometimes referred to as the “efficient frontier” of investing, where the maximum level of return can be achieved given a specific level of risk. The level of acceptable risk is then adjusted to address the needs of each client.
The early part of my career was spent handling bulk commodities and later influenced by ten years working for a futures commission merchant. The combination of these experiences has taught me to appreciate the value of alternative asset classes, among them commodities and precious metals. These types of alternative assets can enhance a portfolio by when, for example, inflation increases or a global crisis (such as in 2008/9) strikes.
The primary way we apply this important lesson of diversity is to construct a core portfolio of multiple assets classes with low correlations. We then establish acceptable ranges of concentration for each asset class and add values to each through the use of technical and fundamental analysis, as well as portfolio tools like quantitative models.
OCM ‘s proprietary portfolio modeling tool is based on mean-optimization, and performs a thorough analysis of current and projected market conditions to determine the exact allocations to a selected group of asset classes.
The challenges to applying what we have learned lie primarily with the more tactical approaches and understanding that you should never be totally uninvolved with an allocated asset class.
It’s been demonstrated with equities that missing the ten best performance days over a ten year period year can negatively impact your returns by as much as 50%, while missing the best fifteen days can wipe out gains even further.
Market timing as such can become a very hazardous and expensive game; our allocation strategies remove emotion from the equation and should therefore lead to better overall investment decisions and significantly improved long term results.
Standard & Poors ‘The Effect of Staying Invested vs. Missing Top Performance Days for Domestic Stocks, 1997 to 2006’ http://www.scribd.com/doc/3478964/Missing-the-Best-Days-in-the-Market