ASSET ALLOCATION

• fundamentally, the only asset classes are ownership and debt.
• desire to balance between aggressiveness and defensiveness. How much emphasis someone should put on preserving capital and how much on growing it. These two things are mostly mutually exclusive. Insistence on preserving capital or limiting the portfolio’s volatility, calls for an emphasis on defence which preclude persuing maximum growth. Correspondingly, decision to strive to maximize maximum growth, requires an emphasis on offense meaning preservation of capital and steadiness must be sacrificed to some degree. You can’t simultaneously emphasis both preservation of capital and maximization of growth or defence and offence.
• the goal of portifolio construction should be optimization and not maximization. It shouldn’t be wealth but wealth persued in an appropriate way taking into account one’s wants and needs.
• the goal should always be to attain the best relationship between return and risk.
• ownership assets (equities) typically have a higher expected return, greater upside potential and greater downside risk.
• they is generally no upside on debt
• offensive is usually played through ownership assets and defence is usually played through debt.
• Intestinal fortitude is key in arriving at the right mix of offence and defence.
• as risk increases not only does the expected return increase but the range of possible outcomes become wider and the bad outcomes become worse.
• because of they’re contractual nature, returns from credit are likely to prove much more dependable than ownership returns.