Risk is always present, and always changing, and always surprising. Some of today’s risks may end as false alarms. Meanwhile, what seems benign, perhaps even beneficial, can bite back tomorrow. So it goes in the money game. The challenge is a) understanding the unending dynamic; and b) managing portfolios accordingly by factoring in various risk scenarios and deciding if the price of a given risk looks attractive or not.
The first step is considering the default benchmark for everyone–a global mix of all the major asset classes weighted passively. The main question is how to adjust this mix to satisfy your particular risk tolerance, time horizon while factoring in any expectations for specific risk and return among the various components. Decades of financial economics tells us no less and this two-step foundation is the analytical focus of The Beta Investment Report.
A little strategic perspective, in other words, goes a long way. It begins with calculating the benchmark, our proprietary Global Market Index, which we report monthly on these digital pages (here, for example) as well as in our newsletter, albeit in greater detail for subscribers. In the long run, this what the average investor holds, which is one reason why we pay close attention to GMI’s fluctuations and ever-changing profile. The next step is evaluating the major components of GMI in terms of how expected return and risk in the near term differs, if at all, from the implied equilibrium outlook. It’s a messy business and so we proceed cautiously, but it’s an essential step on the road for the thousand-mile journey of second-guessing Mr. Market’s asset allocation.