The thought of asset allocation is far-reaching, and its function is risk dispersion. The idea of asset allocation was recorded in the code of Hammurabi more than 3000 years ago: people should distribute wealth equally to land, commercial trade and cash reserves. This simple idea of evenly allocating wealth reflects the most basic function of asset allocation – risk dispersion. The research on the importance and effectiveness of asset allocation has attracted extensive attention. Although the contribution of asset allocation to the overall income is still controversial, the concept of asset allocation has been deeply rooted in the hearts of the people.
There is evidence for asset division, and the allocation emphasizes the overall contribution. Some assets are defined as assets that do not belong to other economic categories, and they are not similar to each other. Generally speaking, the classification of asset categories should meet the requirements of homogeneity, exclusivity and relevance. Different from the traditional single asset strategy, which pursues the risk and return of individual assets, the allocation of large categories of assets focuses on the contribution of individual assets to the overall risk and return of the portfolio. Therefore, it is necessary to co-ordinate the correlation between various assets and break through the limitation of paying too much attention to the return risk of individual assets when “allocating”.
Strategic asset allocation reflects long-term objectives, while tactical asset allocation reflects short-term objectives. Asset allocation is divided into two categories: strategic asset allocation and tactical asset allocation. The former considers many factors outside the market, while the latter mainly focuses on the market; The two have different meanings for investors. The former is the guideline and the latter is the operation guide; The corresponding term of the two is different. The former is long and the latter is short. The two complement each other in asset allocation and play an important role at the same time.
There are many asset allocation methods, and the subprime mortgage crisis raises questions. Before the 1960s, investors’ understanding of asset allocation only stayed at the level of perceptual cognition, and mostly used constant hybrid strategy for risk dispersion. Markowitz’s mean variance model promotes asset allocation from practical exploration to theoretical level, and lays a foundation for the development of asset allocation theory. Since then, more asset allocation methods have been proposed. In reality, after the subprime mortgage crisis in 2008, the emergence of new market characteristics has widely questioned the Xiandai Investment Co.Ltd(000900) portfolio theory.
Comparing the results of asset allocation, we compare the results of different allocation methods, including equal weight method, risk parity model, mean variance model and our proposed financial cycle index method. It is found that in terms of overall income, the method of asset allocation based on financial cycle index is significantly better than several traditional asset allocation methods, but it performs poorly in terms of maximum pullback. In a word, the financial cycle index method is an effective attempt and beneficial supplement to the traditional asset allocation method, but there is still room for further improvement.
Risk warning: model failure risk. Historical results cannot represent the future.
