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The Art of Asset Allocation

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The Art of Asset Allocation

Asset Allocation Principles and Investment Strategies for Any Market


15 min read
10 take-aways
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What's inside?

To earn investing rewards and control risk (well, as much as possible), embark on a thoughtful asset allocation routine.

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Editorial Rating



  • Applicable


Decades of research by scholars and financial practitioners have generally supported the reasonable counsel "don’t put all your eggs in one basket." But it is one thing to advise investors to diversify, and another to show them how. Author David M. Darst outlines a systematic approach to parceling out your savings among different investment assets. There’s a science to asset allocation, though its principles are not immediately apparent. Darst treats these precepts with admirable thoroughness in a book that is, mostly, accessible to an educated layperson. But brew some strong coffee. Readers lacking a business or finance background may find the theoretical discussion difficult and tedious, particularly given the deliberate style. However this 2003 book follows one of the most dramatic periods in stock market history, the 1990s, when even sophisticated market watchers wondered if the sound financial principles cited here still applied. The ensuing bear market made it clear that the laws of risk and return had not yet been repealed. In this atmosphere, welcomes this solid explanation of risk and return.


The Realities of Investing

Risk and return are the two fundamental facts of investing life. The old saying, "There’s no such thing as a free lunch" pretty well sums up the essence of the theory underlying asset allocation. But some of the best minds in finance have spent decades parsing all of the iterations and implications of that old saw. The product of their effort is called Modern Portfolio Theory.

This theory relies on the concept that markets are efficient. In an efficient market, it is extremely difficult, if not impossible, to predict prices, because information flows so rapidly through the market. When new information comes to the market, investors react immediately, adjusting the prices at which they buy and sell to include the effect of the fresh data. Prices only change because of previously unknown information. Of course, it is impossible to predict unknown information, since it arrives unexpectedly and randomly. Therefore asset prices move randomly and it’s not possible to predict them either.

This observation is controversial. Entire schools of investing are based on the opposite proposition: that asset prices are, in fact, not random, but move...

About the Author

David M. Darst is a Managing Director and Chief Investment Strategist in the individual investor area of Morgan Stanley. He also wrote The Complete Bond Book and The Handbook of the Bond and Money Markets.

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