The technical aspects of designing and managing asset allocation are well known. If anyone’s mystified about the fundamental principles that support and promote enlightened portfolio strategy, it’s not for lack of reading material. Indeed, the literature on this topic is wide and deep, as I discussed in my book Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor. Reducing the key lessons down to the essential points leaves us with two recommendations: diversify across asset classes and rebalance. The details matter, of course, but the basic framework is clear. So why do so many investors fall short of respectable results through time? The reasons have little if anything to do with a lack of technical know-how. Most of what we need to know is already available. But there’s a glitch, and it comes from within. In sum, behavioral risks are to blame for quite a lot of the disappointing portfolio returns that harass investors.

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The US economic trend remains relatively stable in the wake of a sharp but brief decline in June, according to a markets-based profile of macro conditions. The Macro-Markets Risk Index (MMRI) closed at 10.1% on Thursday, August 22—a level that suggests that business cycle risk remains low. The latest 10.1% value is well above the danger zone of 0%. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply a bias for economic growth.

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