Strategic Fixed Income Investing: An Insider's Perspective on Bond Markets, Analysis, and Portfolio Management

CHAPTER 7

Asset Allocation

In the business world, the rearview mirror is always clearer than the windshield.

—Warren Buffett

Asset allocation is an integral piece of investing. This chapter will discuss the broad theme of asset allocation and why it is necessary. I will walk you through laying the groundwork for tracking the markets and applying what you see to your strategy, and show the specific need for going global. A more detailed outline of creating an asset allocation mix was covered in Chapter 6, Portfolio Construction.

Image you are driving across the country and you come to a fork in the road. This fork is unique. Instead of the typical fork with three or four prongs, you are faced with a six-pronged fork yielding multiple decisions to make. This a daunting task, to say the least, that all investors at one time or another have encountered. Adding uncertainty to the mix is the fact that not one of the prongs is labeled. There is no information showing up on your car's GPS system, and even your map is blank. All you have to go on is your instinct. Unfortunately, your instinct doesn't go too far, and may fall short even when it comes to providing comfort to the passengers in your car.

Now picture each prong of that fork as a different segment of the fixed income market. From an investment perspective, markets rarely telegraph a direct route or paint a clear picture of future movements. This opaqueness can leave investors disorientated and less than 100 percent confident ...