The terms asset allocation and passive investing are generally interchangable. There are four basic ingredients: a) determine a mix of asset classes based on investment goals and risk tolerance; b) select the best performer(s) in each class; c) allocate funds to each and HOLD them; d) periodically re-balance and re-adjust asset mix as investment goals evolve. Sometimes this approach is referred to as strategic asset allocation to be distinct from tactical asset allocation which is an active management methodology where investment dollars follow the hot sectors of the day.
Volumes have been written on the topic of asset allocation intended for both academic and mass consumption. I’m probably showing indeference by attempting to cover this topic in a blog, so please don’t take this to be anything but a personal, distilled impression of the vast literature available. Besides the recommended readings and links through out, I draw heavily from three resources that I can’t rave enough about: FundAdvice.com by Paul Merriman, a money manager based in Seattle; Index fund advisors, another money management firm utilizing DFA products (check out their eBook here); and Money Chimp, a treasure trove of information that presents technical material in a remarkably clear and succinct manner.
The following articles are planned in this series:
– Introduction (this post)
– Volatility is not your friend (a brief introduction to the modern portfolio theory)
– Asset classes: Determine your asset mix
– A simple all-ETF portfolio
– Tweaking the asset mix
– Index investing
– Invest in an index fund to beat the index?
– Final word
From time to time, I will discuss what I’m doing in my own asset allocation accounts as well as tracking a basic ETF based account that I set up according to Paul Merriman’s website.