Asset allocation needs a revision. In the world with reconstruction, re-marketing and reselling repurposing, redirecting and rethinking it seems obvious that our most sophisticated and complicated decision making is subject to multiple or continuous iterations.
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Multiple iterations allow for adaptation and the refinement (pun intended) of the original process. This process of multiple iterations is like our own evolutionary heritage. As humans we are constantly learning. The adaptation and evolution of mankind is paramount to our survival.
In fact in is often said,
The common practice is to:
Let me introduce Re-optimization.
Macroeconomic conditions and location of the point in time in the economic cycle should affect the asset allocation. There's a well observed and largely consistent momentum effect studied across stocks. This has had easily the highest payoff over the last few decades of any of the factors. This momentum effect can actually be applied to any asset class. Take a look on the Federal Reserve site https://fred.stlouisfed.org/ for any major economic series over a period of decades.
These are not random. Asset relationships sometimes drift together, sometimes drift apart. The assets that provided good diversification in 2013 are not the same as the assets providing diversification in 2018. It is a moving target. As any duck hunter knows, your best chance to hit a moving target is to move with it.
There is nothing wrong with asset allocation. It is just incomplete. Asset allocation when created with smart optimization is a good step. But reimagining the portfolio construction to account for dynamic market conditions and stock selections from the beginning with a Re-Optimization strategy we think completes the story.