Asset Allocation

Everything which has a beginning also has an end, this statement can be soundly applied onto my National Service, which started 20 months ago on April 2008 and is coming to a close in Feb next year. Through disciplined saving and prudent spending (though there were occasional self-pampering involved), I find myself in charge of a modest amount of capital to allocate and manage.

Indeed, I have explored a great variety of financial instruments, which can range from the "safe" corporate bonds and governmental obligations to "speculative" options and futures trading. I found many of their concepts and characteristics interesting; but when it comes down to selecting one to build a portfolio the choices are pretty much limited.

Graham's philosophy resonates well with me, and thus I believe the first question one should ask is to elect to be a defensive or aggressive investor. Defensive means freedom from concern, annoyance, the need for making frequent decisions. Conversely, aggressive suggests the willingness and the ability to spend time searching for the ever present bargain opportunities.

Attaining the average result requires a minimum effort, but to achieve superior results, even of a slight magnitude, is much harder than it looks. Due to my limited knowledge and experience, it is probably wise to select the defensive (non-enterprising) path.

As Graham stated, percepts crystallised out of experience may run the risk of not withstanding the test of time. Understanding this inevitable development can well reduce the risk. While sweeping statements or easy generalizations (eg any bond is safer than any stock-try not to tell this to a bondholder full of defaulted bonds) do not retain its validity through the passage of time, the enduring principles are the ones which are closely relation to human nature and behaviour. A leopard never changes its spots. Concepts of behavioural finance such as overconfidence, loss aversion and mental accounting are useful ideas which offer explaination for some of the financial phenomenon we witness today.

Never stop thinking.