The Art of Asset Allocation Summary: David M. Darst

The Art of Asset Allocation Summary

The Art of Asset Allocation Summary provides a free book summary, key takeaways, review, best quotes and author biography of David M. Darst’s book regarding asset allocation.

Years of studies by financial scholars support one common advice. That is, “don’t place all your eggs in a single basket.” But, it’s one thing to advise and another to tell them how. Author David M. Darst offers a systematic way for this. He shows how to divide your money among different investments. There’s a technique to asset allocation. Darst treats these principles with remarkable diligence in his book The Art of Asset Allocation. This book is easily accessible for an educated layman. Readers not having a finance or business background may find the discussion tough. But, this book follows a dramatic era of share market history. That is, the 1990s – when everyone wondered if the principles stated here still applied. It was evident by the bear market that laws of risk-and-return hadn’t been canceled. We welcome this excellent explanation of risk-and-return in this atmosphere.

“Investors should seek to identify assets with value or growth potential, reasonable prices, and realistic ex­pec­ta­tions for realizing value or achieving future growth.”

This Summary Will Help You Learn

  • The principles key to the theory and practice of asset allotment; and
  • Pros and cons of varied asset classes.


  • Asset allocation can have different meanings. It depends on the speaker and the audience.
  • It seeks to combine assets to adjust the risk-return trade-off.
  • Asset allocation could be high risk, reasonable or conservative.
  • Modern theories of portfolio and efficient market lay the basis of asset allocation.
  • As per Efficient market theory, a security’s price shows all information available. Hence, it’s very tough and rare to beat the market.
  • According to Modern portfolio theory, the reward comes only by taking the risk. But, diversification may help you prevent some risks. This way, you can maximize rewards at an agreed risk level.
  • There’re three main asset classes. Stores of value, capital, and consumables.
  • Investors with more time must take more risk.
  • A person planning asset allocation tactic must consider many things. For example, his/her age, tax bracket, wealth, income needs, etc.
  • Investors may twist their asset allocation tactic by having more or less in some asset groups.

“As­set-al­lo­ca­tion op­ti­miza­tion refers to the process of identifying portfolios of assets that are projected to generate the highest possible expected return for a given level of risk, or al­ter­na­tively, to carry the lowest possible degree of risk for a given level of return.”

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The Art of Asset Allocation Summary

The Realities of Investing

Risk and reward are two fundamental truths of investing life. As they say, “there’s ain’t anything like free lunch.” This pretty much sums the core of the theory behind asset allocation. But, some finance experts have spent years analyzing all the meanings of this saying. The result of their hard-work is called Modern Portfolio Theory (MPT).

This theory revolves around the idea that markets are efficient. In such a market, it’s very tough to forecast prices. It’s because information passes so quickly through the market. So, when new information arrives, investors respond fast. They adjust the prices at which they sell/buy to include the impact of fresh data. Prices shift only due to earlier unknown information. Of course, it’s not possible to forecast unknown things. Hence, asset prices change randomly. So, it’s impossible to predict them either.

Controversial Opinion

Such an opinion is controversial. All schools of investing center on the opposite idea. That is, asset prices aren’t random. Instead, they shift predictably in reaction to some situations. For example, past price action, weather, political changes, or any other possible factor. Modern Portfolio Theory doesn’t disagree that such events can impact share prices. But, it opposes that investors can over time forecast and profit from them.

If prices randomly move, responding to new data, then doubt about prices is permanent. Plus, the risk that prices may shift is constant. Many investors see risk just as a possibility that their investments’ value will fall. But, Modern Portfolio Theory considers risk as standard deviation around means. Hence, an unusual increase in value is as much of a risk as an odd decline.

Advocates of MPT

Supporters of MPT think that it’s impossible to get rewards without risk-taking. Plus, reward and risk are often complementary. High rewards mean high risk and vice versa.

These lines aren’t rigid. A low-risk portfolio might’ve few high-risk assets. In contrast, a high-risk portfolio may have few low-risk assets. It isn’t the ingredients that determine the risk-and-return of a portfolio. Instead, it’s a quantity of these ingredients.

Asset allocation means selecting the ingredients and deciding their quantity in a portfolio. The purpose is to obtain some degree of risk and reward.

“There are several different and equally valid meanings and definitions of risk.”

Asset Allocation: The Basics

Asset allocation could be highly sophisticated, technology-intensive, quantitative process. Or it could also be the rule of thumb process. Professional investors generally use specially designed software for calculations. Individual investors might merely determine that they want to diversify. Most investors are somewhere in between these two ends. Regardless of what your position is, asset allocation has the following steps:

Process of Asset Allocation

  • Review of circumstances – A portfolio must be a result of the sum the investor needs to invest. This must also include his wealth goals, tolerance to risk, etc. It requires an individual strategy.
  • Asset selection – Criteria covers the amount the investor has for investing. Plus, the amount of time he/she has to spend on asset allotment. His/her risk preferences. Besides, the investors’ ethical or social values, and tax status. Everyone may have different preferences. For example, some avoid tobacco stocks.
  • Asset assessment – Assessment means finding the past and likely future risk-and-return of every asset. The investor must focus on any situation where the asset price changed from the standard. Then, analyze why this happened. An asset’s future can’t be told in an efficient market. But, the investor must know how fundamental economic factors have influenced asset in the past. This way he/she can conclude about the asset’s likely future performance.
  • Scenario planning – An investor must consider how an asset will perform in different situations. This should be based on the asset’s past performance. Scenario planning must also find the investor’s likely response to various events. This can also be through recent reactions in similar situations. It’s one thing to embrace the risk of massive share-market investment to get rewards. But, some investors couldn’t get out of a down market. They must weigh their mental and emotional stamina for this method. Beware that markets and investors go through emotional swings. Hence, try to resist being caught up in extreme moods.

Overweight, Underweight

Accurate prediction of an asset’s future performance in an efficient market is impossible. Past performance isn’t an assurance of future performance. But, such an understanding may give helpful data about what’s reasonable to expect. One way is to check asset performance over many time periods. For example, five years, ten years or 20 years.

Why it’s crucial to consider different time periods? There was a review of the S&P500 index during the later part of the 90s. It showed double-digit returns every year. In fact, in 1995 the returns were over 30%. A review of Nasdaq Composite shows an increase of 85.6% in 1999. But, a review of a more extended period will show that these returns were abnormal. Hence, an investor must never make asset-allocation decisions on short-term returns.

When to Underweight and Overweight?

An investor must consider many factors when reviewing an asset’s past performance. These may include the social, economic and political context of such performance. Similar conditions may likely be present in the future. So, the investor might opt to underweight or overweight the asset in the portfolio. For example, interest rates are meager. Plus, the economy is starting to increase. Them it’s okay to expect an increase in interest rates too. Past data shows that some classes of bonds lose value with interest rates hike. So, will your portfolio include bonds? Yes? Then allocate less of those which may suffer when interest rates increase. This decision is to underweight an asset.

In contrast, suppose interest rates are very high. Plus, it seems justified to expect them to decline. Then you may opt to overweight bonds which will benefit from falling rates.

Most Common Mistakes

There’re many powerful computers and high-end software. These allow single investors to take high-quality asset-allocation decisions. Single investors have some unique advantages over professionals. Firstly, they don’t have to assess their performance based on periodical results. Rather, solo investors can have a longer view. But, they must also avoid some common mistakes:

  • Time horizon blindness – Most investors say that they’re investing for long-run. Hence, they build a suitable long-run portfolio. But, they pull out their money just after a year or two. This is often in response to short-term cash need or market reversal. Others say that they’re investing for short-run. But, even they fail to adjust the portfolio timely.
  • Failure to consider real value – An asset’s nominal value may be constant or even rising. And, yet it might be losing actual value due to inflation. Likewise, an asset could lose nominal value yet gain real value due to deflation. Hence, investors mustn’t focus on nominal value. Instead, the focus should be on real value.
  • Misestimating risk tolerance – When building a portfolio, investors may credit themselves more than what they’re due. They may decide to face ups-and-downs in some asset groups. It’s because this’s the logical thing to do given their goals. But, the fact is, they’re much less tolerant to risk than what they believe.
  • Failure to consider total return – Overall return is more crucial than yield. All investors, even those investing in income-producing assets, must know this.
  • Ignoring expenses – Expenses could cost a lot. Investors who don’t consider expenses might lose too much money. Suppose compound yearly returns over a 15-year period are 8%. But, even the expenses of 1.5%p.a. will reduce capital growth by 20%.
  • Failure to see that every investment is a trade-off – A single asset can’t provide everything. Especially not high-return and low-risk. Investors ought to be disciplined about asset allotment. Because it builds a portfolio which will enable the investors to attain investment goals.
  • Failure to diversify genuinely – Many investors wrongly think that they’re diversified if they own an S&P500 fund. But, this index fund only gives diversification in one asset group. That is large-capitalization American equities. To diversify genuinely, an investor must build a portfolio which has other assets. Many don’t create portfolios with enough diversity. Hence, they’re taking more risk than they should get expected returns.

“Many investors have a tendency to overrate their investment acumen, the probability and /or precision of their forecasts, the likely values of future outcomes, and the de­pend­abil­ity and worth of their financial decisions.”

Looking beyond Asset Allocation

Asset allotment isn’t the only approach to investing. It’s only the most logical way considering the evidence about markets. Forecasting how assets will act in any period is very tough. Hence, devise a well-planned strategy for allocation. One which will help you control the risk and reap justified returns.

This may seem like a modest goal. But, it’s better than what most investors achieve. Especially during tough times.

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The Art of Asset Allocation Review

It is always a difficult thing to do that how assets should be managed and allocated. If you are looking for advice on this topic, then this book is going to provide you the great help in asset allocation. The author David M. Darst has focused on this topic with great insight details that how one should manage his/her assets. It has been said by financial experts that “don’t place all your eggs in a single basket”, but the more important thing is to explain that how it should be done. This is what is explained in this book that one should not store his/her assets in one place, instead disperse assets in different places to avoid any significant risks. A person should understand that his/her investments should be divided at various places so that if one place gives no returns, the other may come up with great profits. If assets or money is invested only in one place, then the loss can be bigger than normal.

The book gives detail about different theories like efficient market theory, modern portfolio theory, etc. so that they can understand the different perspective of asset allotment. It is essential to understand that asset allocation itself is a risky process as it needs a lot of review and assessment of assets & circumstances so that a proper scenario can be planned for future investment. People do make several mistakes in their asset allocation decisions like they fail to consider the real value of an asset or fail to consider the returns etc. moreover, they also miss the important part of expenses, and this ignorance can be a cause of their failure. As it is stated in one point of the book that “Many investors have a tendency to overrate their investment acumen, the probability and /or precision of their forecasts, the likely values of future outcomes, and the de­pend­abil­ity and worth of their financial decisions”, which shows that investors should remain careful and planned while making asset allocation decisions.

The Art of Asset Allocation Quotes

“Investors should seek to identify assets with value or growth potential, reasonable prices, and realistic ex­pec­ta­tions for realizing value or achieving future growth.”

“As­set-al­lo­ca­tion op­ti­miza­tion refers to the process of identifying portfolios of assets that are projected to generate the highest possible expected return for a given level of risk, or al­ter­na­tively, to carry the lowest possible degree of risk for a given level of return.”

“There are several different and equally valid meanings and definitions of risk.”

“Many investors have a tendency to overrate their investment acumen, the probability and /or precision of their forecasts, the likely values of future outcomes, and the de­pend­abil­ity and worth of their financial decisions.”

“In most asset classes, certain kinds of investors supply capital, either directly or through in­ter­me­di­aries, to certain investment des­ti­na­tions for that capital.”

“Investors would be wise to develop an un­der­stand­ing of the rates of return that generally result from investments in specific asset classes.”

“In general, the soundness and at­trac­tive­ness of an investment depend vitally on the overall health of a country’s society comprised of in­ter­de­pen­dent financial, economic, political and social factors, among other features.”

“In a general sense, it is possible to develop broad as­set-al­lo­ca­tion guidelines that reflect investors’ mentality, investment outlook, and chrono­log­i­cal age, to take advantage of the relevant char­ac­ter­is­tics of the major asset classes.”

“During the course of an investment experience, investors will likely feel the effects of several different, usually overlapping, cycles that can affect their asset allocation.”

“Of all the influences affecting asset allocation, investors’ own profiles – including their background hopes, fears, dreams and financial position – are of paramount importance.”

“According to Modern Portfolio Theory, one of the overriding goals of asset allocation is to minimize un­com­pen­sated risk through di­ver­si­fi­ca­tion.”

About the Author

David M. Darst is the Chief Investment Strategist and MD in the individual investor Field of Morgan Stanley. His works include The Handbook of the Bond and Money Markets and The Complete Bond Book.


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