Asset Allocation in a Crisis

Abstract

The market crisis of 2007 and 2008 shattered many investors’ notions of the efficiency and stability of markets. It also likely shattered a lot of investors’ confidence in asset allocation schemes. Some advisors thought they were following sound strategies, only to have severely adverse results. In our view, the financial crisis of 2007 and 2008 also created a crisis in asset allocation. However, we believe that it was the implementation, and not the essence, of asset allocation that failed. In our assessment, there are three main lessons from the market crisis of 2007 and 2008: (1) Strategic asset allocation is not static asset allocation; (2) An awareness of economic and market conditions should inform portfolio allocations; (3) Risk management goes beyond “checking the box” of size and style exposure. Other factors, like sectors, countries, and liquidity, also matter.