Every financial literature and study has seeped into our brains that asset allocation is one of the basic principles of portfolio management. Financial publications, peer-reviewed literature, and books show that the distribution of assets is a significant contributor to total returns.
This contribution rate varies between 50% and 95% depending on how the data is analyzed in terms of terms, market and asset coverage, dividends, inflation, and other parameters. You can now easily get to know about financial assessment strategies from professional advisors.
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Buffett's portfolio shows that 10 companies make up 85% of the portfolio. If risk reduction is generally expected from asset allocation, why don't portfolio or fund managers manage them with low risk and achieve drastically negative performance in a crisis? Shouldn't asset allocation provide this negative safety net? Doesn't that mean under risk management. What's the point of managing risk if the fund loses market?
As the saying goes, in retrospect it all made sense. Likewise, analyzing reverse risk data and using this risk model for forward design is a good place to start. The main risk with these models is that they fail to take into account the macroeconomic scenario and its relationship to total returns.
As the macroeconomic environment changes, these assumptions, patterns, relationships, and returns change. They are no longer valid. Let's take an example; It is generally said that stocks always grow in the long run.
This only applies when the economy is on a growth path. This only applies to companies that are adapting, companies with good corporate governance, business models that are run professionally and sustainably. Stocks will not go up if the company has a bad business model, poor management, etc.