Asset Allocation & the Global Financial Crisis: The Standard Case for the 50/50 Balanced Account and the Follow the Fedd Investment Strategies

Abstract

Major institutional investment managers, such as large university endowments, have based their investment portfolios upon tactical asset allocation among multiple asset classes with low correlation with the goal of achieving superior risk-adjusted returns. Until recently, this strategy has been extremely successful achieving compound annual returns over time of 10-15% with lower levels of volatility and superior risk-adjusted returns.However, during the current financial crisis, many of these asset classes experienced high degrees of correlation as they all decreased in value. It appears that in a global financial crisis, any asset classes that contain any form of market risk are quite linked. In addition, many alternative asset classes, such as, hedge funds and private equity, not only decreased in value but also were illiquid in nature. This has impeded asset class re-allocation efforts.We examine the classic 50/50 balanced investment portfolio in comparison with fixed asset allocation portfolio in multiple asset classes. Despite the increased diversification, we find the investment performance to be quite similar. The reason is that many asset classes can be highly correlated in a downturn. Thus, riskless assets offer the only real protection in a severe downturn. The Follow the Fed® investment strategies offer the ability to enhance the performance of the classic 50/50 balanced portfolio in both positive and negative market environments. The results over time are long-term returns superior to the original 50/50 balanced portfolio. These strategies are tested over the periods 1996-2014 and in select cases 1970-2014 with live signals for them from 2006 and 2007.