Adaptive Asset Allocation

Acknowledgments xi

PART I THE PHILOSOPHY OF SUCCESSFUL INVESTING 1

CHAPTER 1 The Most Important Concepts in Wealth Management 5

CHAPTER 2 The Narrative Is Reality 11

CHAPTER 3 Tightly Grouped Arrows Nowhere Near the Bull’s-eye 15

CHAPTER 4 What Is Gestalt? 19

CHAPTER 5 Measuring the Relative Value of Portfolios 23

CHAPTER 6 The Whole Is Greater than the Sum of Its Parts 27

CHAPTER 7 Our Process Is a Financial Gestalt 29

PART II SAVING AND WITHDRAWING FROM PORTFOLIOS 31

CHAPTER 8 Beware of Those Pesky “Volatility Gremlins” 33

CHAPTER 9 It’s Not Just the Destination, It’s Also the Journey 37

CHAPTER 10 In a Perfect World 39

CHAPTER 11 Home on the Range 41

CHAPTER 12 Timing Is Everything 43

CHAPTER 13 Longevity Risk 47

CHAPTER 14 Plan for the Worst, Hope for the Best 49

CHAPTER 15 Sequence of Returns for Savers 53

CHAPTER 16 Individual Rate of Return for Savers 57

CHAPTER 17 Sequence of Returns for Retirees 59

CHAPTER 18 Do You Feel Lucky? 63

PART III CURRENT HIGH VALUATIONS MEAN LOWER FUTURE RETURNS 65

CHAPTER 19 A Simple Model to Forecast Equity Market Returns 67

CHAPTER 20 Implied Future Returns over the Next 20 Years 73

CHAPTER 21 How Do We Do It? 75

CHAPTER 22 Forecasts 80 Percent More Accurate than Always Assuming Long-Term Averages 81

CHAPTER 23 Roller Coasters Are for Amusement Parks 83

CHAPTER 24 The Last Five Years Have Been a Triumph for the Ostriches 87

PART IV AN INVESTMENT FRAMEWORK FOR STABILITY, GROWTH, AND MAXIMUM INCOME 89

CHAPTER 25 A Word about Asset Allocation 91

CHAPTER 26 The Optimization Machine 93

CHAPTER 27 Garbage In, Garbage Out 95

CHAPTER 28 All We Know Is That We Know Nothing 103

CHAPTER 29 If We Know How Assets Should Behave 107

CHAPTER 30 A Structurally Diverse Investment Universe 119

CHAPTER 31 If We Can Estimate Volatility 121

CHAPTER 32 If We Can Estimate Volatility and Correlation 125

CHAPTER 33 If We Can Estimate Volatility, Correlations, and Returns 129

CHAPTER 34 Summary of the Optimization Machine 133

CHAPTER 35 Building to Adaptive Asset Allocation 135

CHAPTER 36 Integration of Adaptive Asset Allocation 141

PART V WHY YOU SHOULD TRUST THE RESEARCH 145

CHAPTER 37 The Usefulness and Uselessness of Backtests 147

CHAPTER 38 Tactical Alpha and the Quantitative Case for Active Asset Allocation 155

CHAPTER 39 Sensitivity of Safe Withdrawal Rates to Longevity, Market, and Failure Risk Preferences with Implications for Asset Allocation 181

CHAPTER 40 Winning by Not Losing. Or, Bootstrapping to Estimate Risk 203

Final Thoughts 207

Bibliography 209

Index 213