Balanced Asset Allocation. Lee Bill
target audience was anyone interested in a thoughtful analysis of asset allocation. This applies to the entire spectrum, from novice to expert. Consequently, an indispensable part of the process was to seek honest feedback from a wide range of people.
The first thank-you goes to my friends at Bridgewater, the organization that pioneered many of the core concepts presented in this book. Ray Dalio, Seth Birnbaum, David Gordon, and Parag Shah were invaluable supporters. I am grateful to each of them for introducing me to these ideas and providing essential feedback. This group of special individuals ultimately inspired me to accept the challenge of writing this book and publicly sharing these important concepts.
I am grateful to Bill Lee, a true expert in the balanced portfolio concepts, for writing the foreword and taking the time to discuss these ideas with me. We share a similar passion for investing, and I am so fortunate to have met him through this process.
Charles de Vaulx, one of the most successful investors in the world, has expressed particular interest in these topics. He and I have spent countless hours debating the merits and potential flaws of the approach. He offers a unique assessment because of his financial expertise, and perhaps even more importantly, his intellectually curious and naturally skeptical nature.
Sam Lee from Morningstar offered suggestions that incorporated his experience with many of the concepts presented here. I am appreciative that he took the effort to share detailed, thoughtful comments that materially enhanced the final manuscript.
I would also like to acknowledge Fran Kinniry (Vanguard), Rob Arnott (Research Affiliates), and Dr. Vineer Bhansali (PIMCO), three investment industry giants, for reading through the manuscript and taking the time to provide insightful input.
Other financial experts, who I also consider good friends, were kind enough to dive into the manuscript and provide an indispensable peer review. David Hou, Ben Inker, Wendy Malaspina, Nick Nanda, Larry Kim, and Ron Kutak enthusiastically pored over the manuscript and gave advice that made the final book a clearer communication of the core concepts. Peter Joers, a founding partner at Greenline Partners and a former senior professional at Bridgewater, took the time to read every word and make valuable suggestions. I must thank Damien Bisserier, my trusted friend and business partner, for all his support and feedback from the very beginning of this prolonged journey until the final review.
I would like to express my gratitude to the many colleagues in the industry who also read the manuscript and offered comments. Each was successful in pointing out ways that I could more effectively convey the message. John Ebey, my longtime friend and mentor, graciously guided me through this book as he has throughout my career. My colleagues of more than a decade, Len Brisco, Sergio Villavicencio, and Michael Tidik, eagerly reviewed what I had written and assisted in making needed improvements. My uncle, Clayton Benner, has a remarkable ability to review all my writings with a fine-tooth comb to uncover and correct oversights. Thank you all.
Above all I wish to recognize my wife of 16 years, Danielle Shahidi, who offered a nonfinancial professional perspective and, most impressively, read the original manuscript multiple times cover to cover. I will forever be thankful for her candid remarks and for helping make the final product so much better than what I had originally put on paper. I must also acknowledge her undying support through this long process, which helped me build momentum at each trough.
Likewise, I appreciate the genuine understanding of my wonderful children, Michael and Bella, on all of those late nights and weekends when I was occupied with this project. Of course, my parents, without whom no opportunities at all would exist, are owed most of the credit for this work as well as any other contribution that I have made. Without the full backing of my family, there simply would be no book.
Finally, my team at Wiley deserves recognition for their patience, direction, and extraordinary efforts throughout this endeavor. I would like to express my deepest gratitude to Bill Falloon for giving a new author a chance. Meg Freeborn, Helen Cho, and Susan Cerra are extremely talented editors and were an integral part of helping me bring this project to fruition.
It has been a very long road from when I had an idea about this book until the time it was actually completed. I feel so fortunate to have had so much encouragement and help throughout this prolonged process and will remain immeasurably appreciative to everyone involved.
About the Author
Alex Shahidi has over 15 years' experience as an investment consultant. He has worked for one of the largest financial firms in the world his entire career. Alex focuses on advising large pension funds, foundations, endowments, and ultrahigh-net-worth families. He currently advises on over $13 billion in assets, including several portfolios that are in excess of $1 billion. His average client portfolio is over $300 million.
Prior to beginning his career in investments, Alex graduated with honors from University of California, Santa Barbara, with degrees in business economics and law. He earned his JD from the University of California, Hastings Law School, and is a licensed attorney in California.
Alex is a Chartered Financial Analyst (CFA) Charterholder, Certified Investment Management Analyst (CIMA), and a Certified Financial Planner (CFP). Alex was designated one of the 250 best financial advisors in America by Worth magazine in 2008. He was also ranked as one of the top 40 advisors in the country under the age of 40 by On Wall Street Magazine in 2008, 2009, and 2010. Barron's, a Dow Jones publication, designated him one of the top 1,000 financial advisors in America in 2010, 2011, 2012, and 2013. In 2014, Barron's listed him among the top 1,200 financial advisors in the country.
Alex has published articles on asset allocation and long-term equity market cycles in the Investments and Wealth Monitor, a national publication offered by the Investment Management Consultants Association (IMCA). Alex has also been published by Advisor Perspectives, a leading publisher for financial professionals. His piece on building balanced portfolios, which was the basis for this book, was recognized with the IMCA 2012 Stephen L. Kessler Writing Award. The article was also recognized by the Wall Street Journal, Market Watch, Moneynews, Fidelity Investments, and Wall Street Daily.
Introduction
Sitting in my seat as an investment consultant to institutional investors, I get to meet the best investment managers in the world and glean from them the best concepts. The purpose of this book is to share with you the concepts I consider to be the most important for investors. Most of the concepts in this book were originally conceived of by Ray Dalio and Bridgewater Associates, with whom I have had an invaluable relationship for the past 10 years.
First and foremost, I want to alert you to the most common and costly mistake investors make: having a poor asset allocation. Portfolios are simply not well balanced. In fact, most portfolios are so inadequately balanced that the risks of underperformance are much greater than investors realize. Even the most sophisticated investors are guilty of this oversight, which means that you are most likely exposed as well.
The good news is that this mistake is easy to fix. Big mistake, easy solution – why do we need an entire book to cover this topic? Portfolios have been imbalanced for so long that such a state has become the convention. Poor balance is normal. Consequently, I first want to convince you that your existing portfolio and strategy need fixing. I also should explain why keeping a balanced mix is especially important in the uncertain economic climate of the present decade. Finally, I wish to provide compelling support for the characteristics of a truly balanced portfolio, and most importantly, introduce you to a unique way of thinking about portfolio construction.
The idea here is not to present another purported winning portfolio tactic that happened to work well in the past. This solution is neither a trading strategy nor a super sophisticated way to capture returns that are not available to others. In fact, much of what you are going to read should sound extremely obvious and rational. I strive to appeal to your common sense by explaining the logic from a conceptual, sensible perspective rather than by attempting to convince you of the merits by backfilling historical data. My goal is to engage you in an intellectual exercise to help you see investing from a fresh viewpoint. In the end, you control your destiny and get to decide what makes most sense. I simply want to contribute to the process of helping you make an informed decision.
Throughout