I’m taking a brief break from “all crisis, all the time” writing. I’m backlogged on book reviews, and it is time to write some.
When I get a book on asset allocation, I suck in my gut and say, “Oh no, not another book that falls into the common traps of only relying on past history, and doesn’t consider structural factors….” I was surprised this time, and I have a book on asset allocation that I can wholeheartedly endorse.
Messrs. Swedroe and Kizer have distinguished between asset classes in sophisticated ways. With annuities they classify immediate annuities as good, variable annuities as bad, and equity indexed annuities as ugly. I could not have said it better.
They identify real traps for the retail investor: avoiding the structured product that Wall Street tries to feed retail investors. They always find new ways to cheat you, encouraging you to sell options that seem cheap, but are quite valuable.
They also describe areas of the asset markets that are less correlated with domestic stocks and bonds — Real Estate, TIPS, Stable Value (I would note the over a long period stable value and bonds do equally well), Commodities, International Stocks, and Immediate Annuities.
Assets that are hybrid between equity and debt tend not to offer much diversification to a balanced core portfolio, so junk bonds, convertible bonds, and preferred stock do not offer much of a diversification advantage. Similarly, Private Equity is highly correlated with public equity returns over a intermediate-to-long time horizon. (I would note that any of those assets classes may present relative valuation advantages at certain points in time, and that expert managers can add value, if you can find them. As for now, high yield is attractive, and there is value in busted convertibles trading for their fixed income value only.)
Hedge funds are difficult to consider as an asset class. Their is much variability across hedge fund types, and within each type of hedge fund. There are a lot of difficulties with survivorship bias in analyzing the effectiveness of hedge funds as a group.
The book has several strengths:
- How do the costs of an asset class affect performance? (e.g. Variable Annuities)
- How do taxes affect performance? (e.g. covered calls)
- How does complexity affect performance? (e.g. Structured products)
- How do personal factors like age and risk averseness affect what products might work well?
- How does inflation affect performance?
Now, this is only indirectly a book on asset allocation. It is not going to give you a set of procedures to tell you how to analyze your personal situation, the relative attractiveness of various classes at present, and the macroeconomic environment, and calculate a reasonable asset allocation for yourself, your DB plan, or endowment. But it will give you the necessary building blocks to see how each alternative asset class fits into an overall asset allocation.
If you want to, you can buy it here: The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad, and the Ugly
PS — Remember, I don’t have a tip jar, but I do do book reviews. If you enter Amazon through a link on my site and buy things from them, I get a small commission, and you don’t pay anything extra. Such a deal if you wanted to get it anyway…