Experienced investors understand that asset allocation - how a portfolio is divided among various asset classes - is the paramount investment decision and the key factor in performance. Unfortunately, many investors do not think of their portfolios in terms of asset allocation. There is often no systematic approach to their investments, and the result is a haphazardly assembled portfolio that is not sufficiently diversified because it is not exposed to enough asset classes. We believe (1) investors should maintain exposure to a diverse group of asset classes at all times, and (2) risk is most effectively reduced by combining uncorrelated asset classes in a balanced portfolio.
AgileInvesting takes an active, rather than a passive, approach to asset allocation. A passive asset allocation strategy fails to account for the fact that risk is rewarded much better in some market climates than others, and that individual asset classes can become over or under-valued. We believe that a disciplined tactical asset allocation strategy, over the longer-term, can be employed to generate superior returns compared to a buy and hold strategy. Our definition of long-term success is not just making money during bull markets, but protecting gains and defending capital during bear markets.
Agile Investments' process for making tactical asset allocation decisions encompasses an analysis of the fundamentals, as well as the technical and psychological condition of the markets.
Fundamentals: Our fundamental analysis focuses on asset class valuations, monetary trends, and the econonmic outlook. Valuation at the time of purchasing an asset goes a long way toward determining future returns. Simply put, there are times when assets are priced to deliver attractive returns and other times when they are not. Our analysis of montary trends includes the overall level of interest rates, the rate of money supply and credit growth, and the posture of the Federal Reserve and other global central banks. Finally, our analysis of the economic environment focuses on leading economic indicators rather than current economic conditions.
Technicals: Because market prices discount the future and are a leading indicator of known fundamentals, technical analysis, which is the study of market action itself, is a valuable complement to an analysis of the fundamental backdrop. Technical analysis keeps us in sync with the primary underlying trends in asset prices and allows us to identify important support and resistance levels, which provide valuable aids when making tactical rebalancing and reallocation decisions.
Psychology: Markets are a reflection of mass psychology. Sentiment analysis, which measures the degree of bullishness or bearishness of investors toward a particular asset class, is a contrarian technique that is very helpful in understanding and anticipating market movements. It is based on the premise that whenever investors become significantly one-sided in their expectations about the direction of asset prices, the market will typically move in the direction opposite to that anticipated by the masses.
