We think that active asset allocation, a strategy that rotates among asset classes based on expectations of return and risk, can offer some investors a more attractive overall portfolio option than a static or formulaic approach. In our view, the major problem faced by asset allocators is that the asset class with the highest historical real return, equities, has an annoying tendency to provide highly negative returns periodically. We suggest that a strategy which focuses on trying to avoid big losses while harvesting the high average real returns of risky assets might provide a better combination of return and risk than a static 60% stocks, 40% bonds portfolio, and we present some evidence to support this contention.
