5 Principles for Smarter Portfolio Construction - #1 Don't Just Live In The Past

DON’T JUST LIVE IN THE PAST

The traditional mean/variance approach to portfolio construction — with allocation decisions based on historical averages of asset class returns, volatility, and correlations — may provide a reasonable starting point for investors. However, it fails to take into account many variables, including the likely impact of current and future macro conditions.

Our view: We believe investors are best served by looking ahead as well as behind. Return forecasts generated through a Black-Litterman framework — in which expected returns for various asset classes are not simply based on past averages but rather blended with proprietary views on the future direction of the markets and economy — offers a more sophisticated way to evaluate investment opportunities. This approach not only tends to be better received by investors, but more important, allows for expected risk and return assumptions to evolve based on the ongoing assessment of potential market conditions and their respective probabilities.

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