Scott Kamenir argues that adaptive asset allocation is a more practical approach to portfolio management than traditional modern portfolio theory. Adaptive asset allocation incorporates more frequent rebalancing, such as monthly instead of quarterly, and investing in assets exhibiting relative strength compared to alternatives. This allows investors to better adjust to changing market conditions. It works by regularly compiling and ranking investment opportunities across asset classes based on their strength over the next three to six months. Maintaining adaptability and using a systematic approach like this provides confidence and helps investors manage risk more efficiently.

1. 85Fine Lifestyles Magazine Cleveland
Adaptive Asset Allocation:
Departing from Tradition
Scott B. Kamenir, CFA
Managing Principal
Waypoint Intelligence
33 River Street
Chagrin Falls
440.394.8067
scott.kamenir@waypointintelligence.com
waypointintelligence.com
EXPERTAdvice
H
istorically, strategic asset
allocation for both individual
and institutional investors has
been an application of Modern
Portfolio Theory, a fancy moniker for a
balanced portfolio, say 60% stocks and
40% bonds, rebalanced on a quarterly
basis. Since the dot-com burst, however,
in the early part of this century, a growing
number of skeptics have emerged
questioning the integrity of this approach.
MODERN PORTFOLIO THEORY
& ITS FLAWS Modern Portfolio
Theory, a theory that incorporates three
inputs to create optimal portfolios:
expected returns, expected volatility,
and expected correlations (each of these
forecasts based on long-term historical
data) is widely used in the investment
management industry. Use of long-
term, historical data, however can be
misleading and outright dangerous as
was evidenced during the 2008 to 2009
financial crisis, when all assets began
to move in lock-step with one another,
not providing the very diversification
required by investors when they needed
it most.
A PROGRESSIVE APPROACH
While fairly unpublicized in both
academic and business circles,
adaptive asset allocation is increasingly
becoming recognized as a more practical
approach to portfolio management.
The underpinnings of the strategy
incorporate two basic elements: more
frequent rebalancing, as well as investing
the portfolio in assets that are exhibiting
high relative strength as compared to
other alternatives.
Clients have been used to a quarterly
to semi-annual rebalancing of their
portfolio. While this has been an
industry standard for many decades, we
are beginning to see the value of making
more frequent adjustments, such as on
a monthly basis. Keeping apprised of
market conditions, new developments,
and potential breakdowns in an
investment are all necessary steps in
arming an investor to have confidence in
making adjustments in the shorter term.
The second component, relative
strength investing, means compiling
a group of investments from a variety
of asset classes (i.e. stocks, bonds,
commodities, and currencies), and their
sub-classes (such as U.S. large, mid and
small capitalization stocks, as well as
sectors such as technology, healthcare,
etc.). Once the inventory of such
investment opportunities is assembled,
then a variety of ranking analysis can be
applied to select those most favorable
for the foreseeable future. Generally,
this would be in the context of an
intermediate time frame, such as three
to six months.
CONCLUSION Maintaining an
adaptability to updated market
conditions, as well as having the
assurance to make adjustments when
needed, and a willingness to depart from
“tradition” will help investors to manage
their risk in a much more efficient
manner. Having a simple, logical, and
organized method to filter out all of
the “noise” in the financial media that
we are saturated with on a minute to
minute basis is a great first step to
mastering your portfolio. Embracing a
disciplined and systematic approach,
such as adaptive asset allocation, can
be quite a liberating and rewarding
experience, allowing you to enjoy more
of life, while knowing that your portfolio
is participating in any market advances,
while at the same time limiting risk of
major loss.