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The Intelligent Asset Allocator


The Intelligent Asset Allocator

Contributed by: martingale

Reviews William Bernstein's Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk is an excellent introduction to modern portfolio theory and other modern theories of investment: one that anyone can read. Bernstein has a deep understanding of the academic literature, and a skillfull way of explaining it all in terms that anybody can understand. You'll learn how to adjust a portfolio to compensate for risk and about the theory of asset allocation in light of real world market behavior.

William Bernstein is a medical doctor who has earned a reputation for having a sound understanding of academic investment literature along with a knack for explaining it in every day terms. If you've ever wanted to learn about modern portfolio theory, but been put off by the boring, arcane way it is often taught, then you should read The Intelligent Asset Allocator. The book is clear, sober, and well written. It provides an excellent general introduction to the theory of asset allocation and does so in a way that you can apply what you learn directly to your own portfolio.

In addition to teaching the basics of the risk/return ratio, beta's, and the efficient frontier, this book does a thorough job of covering the academic debate over whether the stock market is truly efficient, or whether it contains "anomolies" that can be exploited for profit. Bernstein neatly describes the concepts of the Efficient Market Hypothesis through a series of entertaining, thought provoking vignettes. He goes on to cover Richard Thaler's counter-theory of Behavioral Finance--the idea that human psychology distorts the market in specific, potentially exploitable ways. Bernstein doesn't back off from covering the tougher aspects of these theories, but instead works hard to put them down in everyday language so that you not only grasp them, but can apply them to your own investments.

The result is a book that counsels a balanced approach to investing, detailing a method of constructing your portfolio that is steeped in the best understanding we have of how the market works. Bernstein's approach pays heed to the likelihood that you simply can't beet an efficient market, and yet offers a "rebalancing" escape hatch in case the market goes crazy again.

What Bernstein recommends you do is build a solid, globally diversified portfolio around market cap weighted indexed funds, exactly as a hard core efficient market advocate would have you do, and to "buy-and-hold" this portfolio for a long time. However Bernstein also recommends a credibly researched policy of rebalancing this portfolio over time based on strict rebalancing rules, so as to avoid being sucked into a stock market bubble. Bernstein also explores the idea that you could slightly overweight some segments of the market to profit from some of the market "anomolies" alleged by behavioral finance theorists. The rebalancing tricks might or might not pan out, but this compromise won't get you into much trouble if the efficient market hypothesis carries the day--yet it also doesn't ignore the body of evidence suggesting there might be more to it than that.

This is a book that will make you think, one that will teach you to see the market through the eyes of a financial economist. While it's clearly written, it does convey deep ideas that require some thought to digest. You'll want to read it slowly, mulling over the implications of each chapter as you progress. Once you've read this book you should have a clearer understanding of how the market works, and a set of practical tools which you can apply to managing your own investments.


  1. General Considerations
  2. Risk and Return
  3. The Behavior of Multiple-Asset Portfolios
  4. The Behavior of Real-World Portfolios
  5. Optimal Asset Allocations
  6. Market Efficiency
  7. Odds and Ends
  8. Implementing Your Asset Allocation Strategy
  9. Investment Resources
  10. Appendix A: Becoming Your Own Portfolio Analyst
  11. Appendix B: Correlation Coefficients Among Asset Classes

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The Intelligent Asset Allocator
Authored by: Ralph Clarke on Monday, March 26 2007 @ 01:27 PM EDT
Dear Martin: I have recently purchased some of the books you recommend on your web site, then discovered that your site recieves support from based on these purchases being made through your web site. I was unaware of this and would like to support your noble work. Since I purchased from Amazon (invoice no. ftgh39497 March 09, 2007) is there any way your deserving site can be credited with this purchase? I can't seem to find a way to communicate with you directly. I value the service that you provide to small investors. Please e-mail me at my user e-mail address. Thank you, Ralph Clarke
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