A Better Way…
According to Warren Buffett, the top 2 investing rules are…
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.
I believe that the most important aspect of capital allocation is having an investment approach that protects you from large permanent losses and still gives you an opportunity to make money over the long-term.
Investing globally #%??
All investor's desire the opportunity to participate in most of the upside of markets while being protected from much of the downside. Naturally it is impossible to catch all of the upside all of the time, nor we will not miss all of the downside, however by mitigating risk the long-term equation tends to work out well in our opinion.
For over three decades, most financial people have managed assets using a “strategic” asset allocation approach based upon Modern Portfolio Theory. That method uses historical asset class returns to build a mostly static portfolio based upon past performance. In effect, asset management that aims to hug a benchmark limits upside performance and does absolutely nothing to limit draw down of a managed account’s value.
Not only does the strategic asset allocation approach conflict with the industry disclaimer “past performance is not indicative of future results,” but it also fails to take into account the rapidly moving intertwined computerised markets of today. The real problem is that during correlated market downturns — meaning when many asset classes fall in unison — there is little benefit from the type of “diversification” that most investment people recommend.
My premise for funds management is that capital flows around the globe to the markets and countries that are expected to provide the highest return, adjusted to risk of course. So this begins with movement among currencies, migrating down to bond markets, commodities and equity markets of the chosen country.
IMHO is that if we get the US dollar right, we will tend to get a lot of other things right. Capital flows around the world at an increasing speed, therefore trends can end almost before they begin!
Needless to say a bit of common sense goes a long way.
Therefore an initial goal in the fund allocation process is to follow global capital flow trends. Only after this do we investigate regions, countries and sectors in more detail.