Measuring the Risks of Strategic Tilts for Long-Term Investors

Abstract

Asset allocation has long been thought of in the classic mean–variance framework. But this framework contradicts conventional investment wisdom by implying that the only difference between a conservative and an aggressive investor's portfolio is how much cash to hold (not the composition of the portfolio of risky assets). The problems of this static asset allocation approach are only partially solved by tactical asset allocation. Strategic asset allocation, which responds to shifting expected returns while taking into account the long-term risk properties of each asset class, is a more satisfactory paradigm, but investors need to use it with caution.