An Exceptional Resource for Asset Allocation

In his thought-provoking 2007 book, The Future of Freedom, commentator Fareed Zakaria lamented the decline of professionals in American public life. At one time, according to Zakaria, professionals – lawyers, accountants, doctors, financial advisors and personal bankers – looked upon themselves as public servants whose high levels of character and conscience were their prized possessions. They “played the role of senior advisors – counselors – to their clients, looking out for their long-term interests.” Often a key service of the advisor was “telling his client he’s a damned fool and should stop.”

This character- and conscience-based professionalism met its downfall, Zakaria says, due to increasing competition, declining elitism and exclusivity in the professions, and an increased government role that made it seem unnecessary for professionals to be the ultimate guardians of conscience.

A profession, says a lawyer quoted by Zakaria, “is now a business, and a damn competitive business at that.”

Professionalism is not dead

And yet, Roger C. Gibson’s fine and exemplary book, Asset Allocation: Balancing Financial Risk, Fourth Edition, shows that character and conscience-based counseling still exist, even in the financial profession. It shows that it is still possible for advisors to look out for their clients’ long-term interests, even if it means telling a client that she’s a damned fool and should stop.

Given the proliferation of amateurish investment advice books lining bookstore shelves today, my expectations for Gibson’s work were modest. “Asset allocation” has become a buzz-term, used frequently as a cover for misinformation-based advisory services. Even when used in its helpful sense – a long-term decision about the investor’s relationship with risk and expected reward – it is often coyly hinted by many advisors that it is a route not merely to balancing risk and return, but to superior returns per se. There’s a reason why so many advisors misstate the conclusion of the famed 1985 Brinson, Beebower and Hood paper on asset allocation, citing it as saying that more than 90 percent of investment returns are due to asset allocation, instead of 90 percent of volatility, as it actually says. The misleading implication is that if you are well-advised on asset allocation, your returns will soar.

I was immediately gloriously surprised by Gibson’s book. The book exudes professionalism, honesty, character, and conscience. It avoids all the coy hints of arcane asset allocation benefits that I expected to find.

The book’s main message is that it is a good idea for U.S. investors to diversify their portfolios beyond U.S. stocks and bonds. It recommends diversifying into real estate, commodities, and non-U.S. stocks and bonds. I am grateful to Gibson’s book for enhancing my knowledge in an area where it was deficient – commodity-linked securities. He explains them clearly, and explains how indexes and mutual funds of commodity-linked securities work, and why they are different from (and preferable to) managed commodity partnerships.