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A century of asset allocation crash risk

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We extend proxies of several popular asset allocation approaches—U.S. and Global 60/40, Diversified Multi-Asset, Risk Parity, Endowment, Factor-Based, and Dynamic asset allocation—using long-run return data for a variety of sub-asset classes and factors to test their long-term performance. We use equity and debt assets, commodities, alternatives, and indices to reconstruct the returns on allocation portfolios from 1926 to the present, the entire period for which comprehensive asset pricing data are available. We contribute to the existing literature by developing a laboratory for testing the performance of popular asset allocation strategies in a wide range of scenarios. We also aim to test the importance of the behavioral aspect of investment decisions for portfolio outcomes. In our framework, Factor-Based portfolios exhibit the best traditionally measured risk-adjusted returns over the long run. However, Dynamic asset allocation is most likely to reduce the risk of abandonment of the strategy by an investor and selling the portfolio in panic when they experience losses over their tolerance threshold, because the dynamic strategy exhibits lower expected drawdowns, even during severe market downturns. Across all strategies, risk-tolerant investors who rely on a longer history to set their expectations, whether based upon actual or extrapolated data, experience significantly better outcomes, particularly if their investment horizon includes times of crisis. This study informs portfolio managers, investment analysts, and advisors, as well as investors themselves, of the impact of information, persistence, and properties of various portfolio allocation methods on investment returns.

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Special thank you to Brad Barber for feedback and guidance, to Mihail Velikov for the helpful discussion of the topic, to Penn State BSB colloquium participants, conference session participants at the Financial Management Association 2023 Annual Meeting and Southern Finance Association 2023 Annual Meeting for their comments and suggestions, to Pawan Madhogarhia and Dean Ryu for their thoughtful discussions and recommendations, to Prescott Smith for the invaluable research assistantship, to Rebecca Jackson for editorial assistance, and to the Global Financial Data for making their data available.

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Correspondence to Nonna Sorokina.

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Samonov, M., Sorokina, N. A century of asset allocation crash risk. J Asset Manag (2024).

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