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Review: The Intelligent Asset Allocator

I recently finished reading Bill Bernstein’s The Intelligent Asset Allocator.

In the introduction to Bernstein’s most recent book (The Investor’s Manifesto), he describes The Intelligent Asset Allocator as a failed attempt at writing a plain-English guide to prudent investing:

I was gratified with the response to it, both among academics and general readers. Sadly, I was less than pleased by what my friends and family told me, which usually went something like this:  ‘Jeez, Bill, it seems you know what you’re talking about, but I fell sound asleep by the second chapter.’

So I went in with the assumption that this book was going to be packed full of calculus functions and statistical jargon.

Not at all. It was really quite readable.

The Gordon Equation

As in Four Pillars and The Investor’s Manifesto, one of Bernstein’s major points is that it’s important to pay attention to valuation levels before buying an investment. For example, he argues that we can achieve a reasonable estimate of future stock market returns by using the Gordon Equation, which states that:

Expected Return = Dividend Yield + Dividend Growth Rate

It’s worthwhile to note that one of his messages in The Intelligent Asset Allocator (written in the late 90s) was that stocks were highly priced and had very low expected returns going forward, whereas in The Investor’s Manifesto (written in early 2009) the message is the opposite: stocks have taken a beating, and have pretty good expected returns going forward.

Important reminder: The Gordon Equation, while rather accurate over extended periods (20 years or more), has essentially no predictive ability for short periods–what the stock market will do next year, for instance.

Efficient Frontier

A second major lesson of The Intelligent Asset Allocator is the concept of  the “efficient frontier.” The idea is that, for any given period, there are a number of efficient portfolios, each of which provides the highest return for a given level of volatility, or the lowest volatility for a given level of return.

Of course, there’s no way to know ahead of time precisely where the efficient frontier will lie for a given period. But if we look at enough periods, we can get a sense of the types of portfolios that tend to be pretty close, thereby allowing us to draw some conclusions about intelligent portfolio design. For example:

  • A portfolio comprised 10% of stocks and 90% of bonds often has higher return and lower volatility than a 100% bond portfolio.
  • Over most extended periods, allocating a portion of your portfolio to international stocks will simultaneously increase return while decreasing volatility.

Would I Recommend This Book?

Absolutely–if you’re someone who finds mathematical explanations to be “meaningful and practical” rather than “abstruse and boring.”

That said, before reading The Intelligent Asset Allocator, I’d recommend reading Bernstein’s newer The Investor’s Manifesto. The message is similar, the writing is arguably better, and the data is more up-to-date (and, therefore, more relevant-feeling).

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Comments

  1. His books are great! Not only does it go into the details of how much to allocate, but he also goes into the reasons why. I plan on writing some blog posts about his books. I just finished his latest book. It was great he gave more details on the asset allocation.

  2. Hi, Investor Junkie.

    Welcome to the blog. As you can see, I’m a big fan of Bernstein myself. I really enjoy his no-nonsense approach and willingness to call “B.S.” when he sees it.

  3. Not at all. It was really quite readable.

    Mike, I think we have to accept that what us geeky money bloggers find perfectly readable (even a riveting page turner) is different from the everyday Joe.

    Have you read Swensen? I thought it was super, but it reads like the Notes sections at the back of a company’s annual report. 😉

  4. Monevator: Absolutely true. At the same time, I suspect (though I guess I don’t know) that the average reader of my blog is also different from the everyday Joe.

    Funny you should ask about Swenson. I just started Unconventional Success literally last night. 🙂

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