Abstract
Asset allocation is an exercise in subjective intertemporal preference. Saving and investing demand that we understand this preference, our liquidity needs, and the macroeconomic and institutional context we live in. But we have simply lost that understanding and instead follow regulations. Under the current paradigm, for instance, expected returns are considered the outcome of volatilities modelled after random processes. Nothing could be further from reality. In this chapter, we describe and suggest a method to establish our subjective liquidity and intertemporal preferences first.
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Notes
- 1.
Because debtors, who also have a vote, are usually more numerous than creditors.
- 2.
Harry Markowitz: “Portfolio Selection” in The Journal of Finance Vol. 7, No. 1 (Mar., 1952).
- 3.
Perhaps the only way to help visualize how enslaving the current system is would be to simply transfer the power of paying salaries to workers from employers to a government agency. The government agency would then manage a general payroll ledger on behalf of employers, issuing the payment cheques, net of income taxes.
- 4.
Huerta de Soto, Chap. 4, Section 5, Market Order and Entrepreneurial Creativity, 2008.
- 5.
Assuming in the next 22 years we go back to positive real interest rates, away from quantitative easing/zero interest rate policies.
- 6.
I base this on average Canadian housing prices at the time of this writing.
- 7.
In the nineteenth century, 5% might have been more appropriate, given the lower productivity rates at that time.
- 8.
We know that each security we pick is not a random variable: Its returns do not show a frequency; and if there is one, it does not converge to a defined number, nor will it remain stable regardless of what time series we choose.
- 9.
I exclude from this classification those derivatives used for hedging purpose. A derivative that is used as a hedge directly associated to an identified asset is a capital good.
- 10.
An example is the “tranching” of credit indices. Refer footnote No. 71 in Lesson 4.
Bibliography
Markowitz, Harry. (March, 1952). Portfolio Selection. The Journal of Finance. Vol. 7, No. 1.
Benes, Jaromir, and Kumhof, Michael (August, 2012). The Chicago Plan Revisited. IMF Working Paper. WP 12/202. Washington, DC: International Monetary Fund. Retrieved November 2013 from: http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
Sibileau, Martin. (November, 2012). Why the Chicago Plan is flawed reasoning and would fail. A View from the Trenches. Retrieved November 2013 from https://www.zerohedge.com/news/2012-11-11/guest-post-why-chicago-plan-flawed-reasoning-and-would-fail
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Arisson, M. (2018). Asset Allocation Is Intertemporal Preference. In: Investing in the Age of Democracy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-95903-0_2
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DOI: https://doi.org/10.1007/978-3-319-95903-0_2
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