I'm also giving you the benefit of the doubt regarding the implication I am a fanatic.
Eh, we both know there is no point in discussing with a fanatic.
Asset Allocation is simply a subset of Market Timing.
The technique used is the difference between AA and other market timing techniques. The AA market timers are using price (technical analysis) and their AA as the the timing tool.
At the risk of beating this to death, I second Dex's post above. While people claim not to make a prediction of where the market is heading, they are actually making a bet on the "reversion to the mean", which is still a prediction of where prices are going.
Yes, it is true that the normal rebalancing is using pure price or technical analysis. P/E ratio and any other fundamental measure are not used, even when the latter offer some more insight. I can think of an example. In the 2000 tech bubble, many analysts warned of the impending burst. They said that the "information technology" stocks had grown to become too large a percentage of the S&P 500, in fact way larger than it used to be (I do not remember the actual numbers). Proponents of the tech stocks said that it was a new paradigm. It was the "new economy". I remember thinking to myself that we still needed more than just silicon chips. Don't we still need potato chips? Of course we knew how it turned out. Then, in the years leading to the housing bubble and the subsequent financial burst, I remember someone also noted that the financial sector was getting too big for its britches. Yes, same disastrous results.
Now, if someone rebalances by slicing and dicing the sectors based on P/E, do you call them market timing? If someone got out of the 2000 tech stocks with high P/E or actually negative E, was he market timing too? Or avoiding buying a new home in bubble areas in 2006? Note that he made the decision based on fundamentals, while the normal portfolio balancers only use prices. Perhaps that is the main discrimination between mainstream rebalancers and the "market timers"; the former use price and price only with no regards to fundamentals. It is curious as to how one becomes a DMT if he looks for more signals than price to rebalance.
Following dex's link to Wikipedia, I found the following excerpt that corroborates what I tried to say in some long-ago past posts. Note that the underlining below is mine.
When such backward-looking approaches are used to forecast future returns or risks using the traditional mean-variance optimization approach to asset allocation of modern portfolio theory, the strategy is, in fact, predicting future risks and returns based on past history. As there is no guarantee that past relationships will continue in the future, this is one of the "weak links" in traditional asset allocation strategies as derived from MPT.
Excuse me.... I think you are confusing market timing with a Tactical Allocation.
Ah! I have heard that term before, but did not know that is what people call what I have been doing all these years. I don't get out much on the Web, and just fumble around to do what I think is right. It's amazing that I survive all these years without knowing what people call me: a [-]DMT[/-] Tactical Asset Allocator.
So, by it being given a formal name, what I do is now legitimate and respectful within mainstream investor cycles. Hey, all I could come up with before was the term "clean market timer", because I could not see why trying to look at a stock or a sector fundamental is a dirty deed.
Here's another excerpt from Wikipedia.
There are three basic types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite.
Strategic Asset Allocation - the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon.
Tactical Asset Allocation - method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains.
Core-Satellite Asset Allocation - is more or less a hybrid of both the strategic and tactical allocations mentioned above.
Systematic Asset Allocation is another approach which depends on three assumptions. These are-
The markets provide explicit information about the available returns.
The relative expected returns reflect consensus.
Expected returns provide clues to actual returns.
It seems like nowadays, the buzzword Asset Allocation will give legitimacy and respect to anything anyone wants to do. It's great!
But I will let this subject rest. As I said before, who the hell really cares what something is called. It is just semantics, but I was curious. There are more than one way to make money (and many more to lose it). I believe the most important thing that everyone needs is
diversification.
Happy New Year. Cheers!
