FT.com / Markets / Insight - Insight: When the wisdom of crowds becomes the madness of mobs.
I have been a fan of Andrew Lo for a number of years. I appreciate his comments here regarding tactical asset allocation to manage risk. As a proponent of a core/satellite approach to portfolio mangement, this is consistent with my reasoning. The satellite component is comprised of higher volatility strategies which should and are managed tactically. The core is comprised of lower volatility strategies which can be managed strategically. The objective is to manage risk and maximize expected return given the target risk level.
This inverts the traditional approach which focused on maximizing return while attempting to minimize risk given that target return. I think 2008 demonstrated that the traditional approach of relegating risk management to a secondary issue invites rather dramatic draw-downs and is awfully painful to endure. For my clients, and myself, I'd rather give up upside to protect downside through better risk management and a better understanding of risk tolerance. The "insurance" is worth the premium.
I have been a fan of Andrew Lo for a number of years. I appreciate his comments here regarding tactical asset allocation to manage risk. As a proponent of a core/satellite approach to portfolio mangement, this is consistent with my reasoning. The satellite component is comprised of higher volatility strategies which should and are managed tactically. The core is comprised of lower volatility strategies which can be managed strategically. The objective is to manage risk and maximize expected return given the target risk level.
This inverts the traditional approach which focused on maximizing return while attempting to minimize risk given that target return. I think 2008 demonstrated that the traditional approach of relegating risk management to a secondary issue invites rather dramatic draw-downs and is awfully painful to endure. For my clients, and myself, I'd rather give up upside to protect downside through better risk management and a better understanding of risk tolerance. The "insurance" is worth the premium.
