Asset Allocation Becomes Increasingly Important in Uncertain Times

As we reflect on prior investment periods we are amazed to find that some of the best returns come from out of consensus asset classes or investment opportunities. As an example, entering 2011, many advisors, including ourselves, viewed fixed income as an asset class that that should be minimized. Interest rates appeared to be at a cyclical low and yield chasing had compressed spreads in the investment grade and high yield markets. Fixed income was the best performing asset class in 2011.

In addition, inflation fears abated throughout the year as investors became concerned about an economic slowdown in China and the negative impact that the European crisis may have on global growth. Despite that the two of the best performing asset classes in 2011 were Treasury Inflation Protected Securities and gold, both of which can be viewed as hedges against an inflationary scenario. In early 2012 the European equity markets experienced sharp rallies. This is another example of returns coming from out of consensus places. Given the difficulty of making rational predictions in irrational markets, it is clear that asset allocation plays an increasingly important role in successful investment outcomes.

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Past Essays

• Investment Strategy Update (August 8, 2011)
• The Pause That Distresses (July 2011)
• Risk Assets Are Becoming More Attractive (February 2011)
• Rip Currents (September 2010)
• The Bridge Between Chaos and Opportunity (February 2010)
• Erring on the Side of Caution (October 2009)
• Two Important Decisions We Must Make (May 2009)
• Hangover or Hope? (February 2009)
• Now What? (October 2008)
• I Want My Baby Back. You Can Keep the Bathwater (August 2008)
• We're Not Out of the Woods Yet (February 2008)
• The Repricing of Risk (August 2007)
• Bring the Boats Closer to Shore (2006 Year-End)
• Market Mayhem: Worries Create Market Jitters. What Comes Next? (June 2006)
• A Year of Contrasts: 2006 Investment Outlook (January 2006)
• Investing in the Second Half of 2005: Expect Better Returns (July 2005)
• Investment Themes for 2005 (February 2005)