What's this?  Active Asset Allocation?  Here are two articles by James Picerno who discusses random walk, expected future returns, and whether they are predictable or not, and some other contrarian ideas.

Rethinking Modern Portfolio Theory

http://www.capitalspectator.com/archives/2008/05/rethinking_mode.html#more

Back To The Future Again

http://www.capitalspectator.com/WM/2008/05/back_to_the_futureagain_1.html#more

Enjoy!
Coy

Thanks Coy, interesting articles.

As I was reading the second article on dynamic asset allocation, I thought, uh-oh, this idea might lead to disaster because it could be easily be misused.  I was glad to see Wm Bernstein's remark"

Bill Bernstein, too, says static asset allocation “isn’t a bad idea,” although he
favors a dynamic approach for his client portfolios. Active asset allocation demands
“industrial amounts of discipline,” he reminds

Paul 

I agree,

And, both articles provided a good little summary of Malkiel's A Random Walk.... and Peter Berstein's Capital Ideas.  Unfortunately, as you suggest, people could use some of the other ideas as an excuse to constantly change their AA, and just generally screw it up.

Another theme mentioned in both articles is the amount of info/data that was ignored by these academics since the early work was started, eg "dividends, interest rates, price-earnings ratios, book values, other fundamental metrics, etc".

This is why when people start a sentence with "Studies show.....", my first thought is:  Well, what did the studies purposefully leave out?

Coy

Hi Coy,

This would have, and did for GMO, work well back in 2000 when the valuations were so wide, as Bernstein described, “You could drive a Mack truck through them.” (not an exact quote)

Valuations have converged now, so it is a bit more difficult to identify the markets you would be better off holding. As Phil DeMuth (and Ben Stein) put it in their “Yes, You Can Time the Market,” we will not likely see another bubble like the last one in our lifetime.

It has been my observance a more diversified portfolio is not as subject to market valuations as the lesser diversified portfolio. You could set up a market neutral portfolio if you are concerned over this. Phil DeMuth also offered some of these in his other book, “Yes, You Can Supercharge Your Portfolio.”

One of the most simple market neutral portfolios would be something like, total US, total international, REITs, bonds and commodities. These could be held in equal percentages and rebalanced every year or few.

Chin