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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. (e.g. covered calls) * How does complexity affect performance. (e.g. Similarly, Private Equity is highly correlated with public equity returns over a intermediate-to-long time horizon. 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. I'm taking a brief break from "all crisis, all the time" writing. * How does inflation affect performance.Now, this is only indirectly a book on asset allocation. 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. Variable Annuities) * How do taxes affect performance. 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.
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. Swedroe and Kizer have distinguished between asset classes in sophisticated ways. (e.g. (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. Their is much variability across hedge fund types, and within each type of hedge fund. Structured products) * How do personal factors like age and risk averseness affect what products might work well. But it will give you the necessary building blocks to see how each alternative asset class fits into an overall asset allocation.
Nonetheless some of the chapters provided new information. Topics that this section could discuss include foreign currency and bond mutual funds and ETFs. The review on Variable Annuities in the "bad" investment section is also fair in pointing out the benefit of asset protection in this vehicle. The authors could argue that T Bonds/US Dollar is not an "alternative investment" so it is not within the purview of their book. I would have liked to see a chapter or section devoted on the subject of foreign currency.
However, I think gold is an alternative investment. I am wondering if there are regular discount brokers that facilitate such an approach of rebalancing, though it would cause a taxable transaction and substantial paper work. This would work particularly well now that we have ETFs for so many investment possibilities. This is not intuitive or expected.
Examples: Private equity and the historical evidence in which these investments do not on average do better than publically available investments. I consider myself an experienced investor. I would have liked to see a chapter on those providers/discount brokers that allow easy re-balancing of investments. I think this book is good for the novice or the experienced investor. This book actually does not have a section on "deflation" scenarios and this is how many experienced investors were inadequately diversified in 2008. I also think the chapter of Precious Metal equities explains how to make a (potentially) "flawed" investment into a profitable one.
Finally, I would say that people should generally avoid investing in private equity based on the author's well researched chapter. Since the book lacked sufficient information on these topics, I would say that this book is not "the only guide. First, I would say the review on this book by Stuart-Little that gave 3 stars is worth reading. Neither the word "gold" or "deflation" are in the index of this book. Re-balancing is the last point I would like to discuss, because it helps investors avoid getting damaged by bubbles.
In my 401K, I can do this with a click of a mouse which is particularly attractive since these transactions in a tax advantaged account are tax free.
you'll ever need." However it is the best book I have read or found so I think 4 stars is the right grade.
However, sometimes concentrating a large amount of money in a narrowly focused way, is a way to wealth, perhaps the only way to extraordinary returns; then after the wealth is made, then diversify it in the way that the authors recommend in the remainder of the book.
Some chapters either clarified my thinking on an asset class, or firmed up my thinking which can be very helpful.
I do not know if the authors read these reviews; it might be useful for them to comment below my review and others, especially since so much has happened in the financial markets since there very good book has been written.
Also I am curious about the opportunities or lack thereof in the FOREX.
In 2008, only two asset classes did not go down, gold (gold stocks did go down), and treasury bonds/US Dollar.
In addition, I wonder if the authors could have included a chapter on vehicles that purport to provide the asset allocation that is favored by the authors, Examples include the Permanent Portfolio Fund, retirement targeted funds, and one or more of the PIMCO funds.
This book has lots of useful information for the experienced investor. The chapters on inflation-protected securities and preferred stocks were particularly helpful.
I made a few mistakes before I purchased this book and now I understand why. This book answers to a lot of questions I had about TIPS, Muni bonds and other alternative invetments. I will always use this guide as a reference before making a decision to invest in alternative investments, and I recommend to everyone This is The Only Guide you need to alternative investments. I couldn't get good answers to my questions from other books, covering alternative investments. Larry's book is for beginners and for experienced investors. Larry's knowledge and style shines through the book.
None the less the book is valuable as it covers twenty asset classes and explains which asset classes are flawed or dangerous and why. Still I give it a solid three stars as it is a good introductory book and one has to start somewhere, and for most investors the knowledge of what asset classes to avoid in general will be very helpful, but just remember portfolio asset allocation is a treacherous and complicated subject and this book only scratches the surface. It is relative and depends on the current and future economic environment and how cheap or expensive the asset class is. This is like saying the stock market is always a good investment, but not distinguishing between buying stocks when the market is dangerously high such as in late 2007 versus buying low such as during March of 2009.They discuss at length the theory behind buying collateralized commodity futures funds in that these will be negatively correlated with stocks and hence these funds "diversify the systemic risk of equity investing--the part that is not supposed to be diversifiable." I am slightly suspicious of this theory as the theory is based on historical correlations going back to only the early 1970s and doesn't take into account the rare but painful speculative bubbles in commodity prices. Six good asset classes are covered, along with eight flawed, three bad and three ugly classes. They barely mention the need to adjust one's asset allocation based on one's profession. These past correlations don't always hold and the correlations depend on what time period one examines and how far back one goes, such as twenty-five years or fifty years or one hundred years and whether the periods examined included recessions, depressions or bubbles. I consider this book to be just another investment resource that has to be critically examined and should only be used as a starting point for one's research or investment strategy.
The recent unprecedented (or at least unprecedented for the last 80 years) market conditions compel me to write an in-depth review. Except for the long chapter on hedge funds which is excellent it is not so useful to the advanced investor who is looking for an in-depth understanding of each asset class. For example, they are critical of covered calls in general, but make no effort to explain under what market conditions covered calls are a good investment strategy. In most cases it is assumed the investor will buy into a fund not individual commodities or equities.These correlations are somewhat suspect in my humble opinion. The authors start the book out by listing real estate as one of the best investments, but barely mention real estate/housing bubbles and the crashes that follow.
I found this book to be sometimes poorly researched in the sense that the research is often incomplete. I can't wait for the next edition). Rather than buying one book that treats each asset class in one chapter one would be better off buying several in-depth books on the various different asset classes. It can be misleading to say that a given investment class is good, flawed, bad or ugly. The bad consist of hedge funds, leveraged buyouts and variable annuities. The six good classes are: real estate, inflation protected securities, commodities, international equities, fixed annuities and finally stable-value funds.
However, inexperienced investors with lots of money will most benefit from this book as they will be forewarned of the dangers of many tempting investments.The book focuses on the asset classes, the historical correlations between asset classes and the need for asset allocation in one's portfolio. The eight flawed classes are: high yield (junk) bonds, private equity (venture capital), covered calls, socially responsible mutual funds, precious metal equities, preferred stocks and convertible bonds and finally emerging market bonds. (They devote one paragraph to real estate price declines. Instead they focus on the relative performance of the different asset classes. I also wonder if this correlation will hold up over time if large numbers of commodity futures are solely purchased for their negative correlation with stocks as the very process of buying commodities for this purpose would tend to eliminate the negative correlation as it is ultimately a sophisticated technique to "beat the market" by getting more return for the same risk. (I distinguish speculative bubbles from "legitimate" price shocks due to economic or political events). The ugly are: equity-indexed annuities, structured investment products and finally leveraged funds.This book will be most useful in helping the beginning or intermediate investor avoid the pain of investing in dangerous asset classes. Despite the claim that it is a comprehensive book I found it all in all to often be a superficially researched book on a multitude of topics of which only about 30-40 % are covered in sufficient detail for a serious investor.
For example, if one works in the oil industry then owning oil futures might be a real bad idea as they will perform badly about the time one is at risk for being unemployed, and a real estate broker or builder should in general be underweighted in REITs. Some chapters are excellent and are fully worthy of five stars and others are poor and only worthy of two stars. At any rate this kind of portfolio management requires a degree of sophistication that will be hard for the average investor to implement based on this book as only a limited amount of theory and practical advice is given as to how much of one's portfolio should be allocated to each asset class for one's investment objectives, age and occupation. Techniques to beat the market tend to weaken the more they are used.
Very little information is given as to when an asset class is overpriced or underpriced and how to determine this. A computer programmer would do well to not invest heavily in tech stocks as tech stocks will likely start to drop a few months before he or she is at risk for being laid off. For example, the negative correlation historically present between the S & P GSCI (a widely cited commodity index first developed by Goldman Sachs) and stocks disappeared in the last quarter of 2008. While I am not knowledgeable on all the alternative investments listed, such as the chapter on "Private Equity (Venture Capital)," those investments I am knowledgeable about I found often to be incompletely or superficially covered or even misleading to a lesser or greater degree. Gibson.
The authors base their conclusions on how the asset class behaves as a whole as if it were an index and how the asset classes are correlated to other asset classes. During panics (such as during the last quarter of 2008) all asset classes tend to go down together and correlations go towards negative one and the historical negative correlations between different asset classes no longer hold. A book that covers the topic of asset allocation in more detail is: by Roger C. It simply is not possible to adequately cover this complex topic in one medium sized book as the authors over confidently imply in their book title:
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