If you want to start an argument in the world of investing, strongly advocate for an asset allocation strategy. It has been 62 years since Harry Markowitz published his groundbreaking study, “Portfolio Selection,” in The Journal of Finance, and there still isn’t much consensus on the right way to allocate a portfolio. And there may never be.

In 1952, Markowitz advocated the importance of diversification. He showed how higher returns could be obtained by accepting more price volatility (“portfolio variance”), up to a certain point for a given allocation mix. His argument for not seeking safe returns but rather seeking returns that justify the level of variance taken underpins current mainstream portfolio methodologies.

It’s the application of Markowitz’s theory that remains a source of debate. Everyone agrees that it is not a good idea to put all of your eggs into one basket, such as completely investing your entire portfolio in Alibaba. (The Chinese e-commerce company was set to go public just after we went to press.) However, there is broad debate about how exactly you should go about allocating your portfolio.

I’d love to tell you about a universal standard for portfolio allocation. I can’t, however, because it doesn’t exist. There are several viable approaches, but not one gold standard.

In this month’s issue here, I discuss several approaches to portfolio allocation. The article is not all-encompassing since there are likely more approaches than we have pages in this magazine. There are, however, more than enough to choose from in the article. Plus, studies have shown that too many choices decreases the odds of a decision being made.

The big thing when it comes to picking an allocation approach is not seeking out the one with the highest returns, but finding the one you can stick with. If your sole goal is to maximize returns, I’ll save you the time of reading the article: Just fully allocate to stocks and don’t touch your portfolio for a very long time. Doing so, however, is extremely hard for most people. So if you are like most investors, one of the other approaches presented in the article may better suit you.

As an industry, it would be good to be able to say more than “just pick one.” The finance industry is not alone, however. The medical community is in the same boat when it comes to advising people about how to lose weight. Mathematically, we know that if you want to lose weight, you have to burn more calories than you consume. There is also common agreement that too much salt and too much sugar is bad, while physical exercise (within medically allowed limits) is good.

When it comes to dieting, however, the “just pick one” advice applies. A study published last month in The Journal of the American Medical Association (JAMA) reviewed various diets. The researchers summed up their findings by telling doctors and dietitians to recommend “any diet that a patient will adhere to.”

Determining what allocation approach you will adhere to is where you should direct most of your cognitive effort. Don’t obsess over potential returns, but rather really think about what strategy you can stick with no matter how good or bad market conditions are.

Bill Sharpe discussed the allocation challenge of managing one’s assets in the second part of our interview, which you will find here. As you will see, he said there are many questions about retirement income strategies that need resolving. Given his impressive career, which includes a Nobel Prize in Economic Sciences, that speaks volumes.

Switching topics, Jim Cloonan’s latest Model Portfolio commentary appears here. If you are following the portfolio, or are interested in it, his insights are very helpful. Also, be sure to check the Model Portfolios section on AAII.com on the 15th of every calendar month to see the stocks currently held in the portfolio that are designated as being qualified. These are the primary candidates to consider if you are looking to follow the portfolio.

Wishing you prosperity,

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII