Problems With Asset Allocation
There are various reasons why asset allocation fails to work.
- Investors' risk tolerance is not knowable ahead of time.
- Security selection within asset classes will not necessarily produce a risk profile equal to the asset class.
- The long-run behaviour of asset classes does not guarantee their shorter-term behavior.
- Most all asset allocation decisions fail to consider the effects of home-ownership, membership in pension plans, ownership of annuities, exposure to the economy through a job, the existence of mortgages and debts.
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