The Intelligent Asset Allocator

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Published in 2001 by William Bernstein, The Intelligent Asset Allocator offers advice on constructing a portfolio of passively managed index funds and ETFs. This book includes more math and offers a short primer on portfolio theory. Bernstein strongly believes in the difficulty of beating the market through active management and prefers low-cost index funds and ETFs. He favors a policy of determining an asset allocation that is appropriate to your risk tolerance then rebalancing periodically.

Some lessons that are included in this book.

  • Value Funds – Value stocks have outperformed their peers consistently over a very long period of time. Bernstein thinks that the reason that this pattern has persisted is due to the fact that people have a hard time psychologically buying stocks from companies that are seen as poor performers. However, their aggregate returns prove to superior over the long term.
  • Tax Management – He suggests placing funds that may have large capital gain or dividend distributions into your IRA accounts. These would include bond funds, REIT funds, value funds and emerging markets funds. If an IRA account is not available, he favors using tax-managed funds.
  • Rebalancing – He suggests rebalancing no more than once per year in your taxable accounts. In your tax-free accounts, you can rebalance as often as you like.
  • Preferred Funds
    • Vanguard – he likes most of the Vanguard index funds (except the growth funds)
    • DFA – he likes some of their funds because they cover a couple of asset classes that Vanguard doesn’t (like international small cap)
    • ETFs – he lists several but warns to watch out for higher expenses
  • Equity allocation – he includes a table that you can use to determine how much of your portfolio should be equity based. If you are okay with potentially losing 35% of your total value during the course of the investment period, then you should have 80% equity. If you are only okay with a 10% potential loss, you should only have 30% in equities.
  • Three Factor Model – A regression model created by Fama and French that describes the returns of various portfolios by explaining how much of the performance is due to each of three factors: the general market return, the presence of small caps and the presence of value companies. The model can be used by regressing the performance of a portfolio against the time series performance of the general market, a small cap index and a value index. It can also be used to evaluate money managers by determining how much of their performance is due to the three factors and how much is due to skill.