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2、 law (T 17,U.S. code). 1 Bridgewater Daily Observations 8/19/2004 Bridgewater Daily Observations August 19, 2004 2004 Bridgewater Associates, Inc. (203) 226-3030 Greg Jensen Jason RotenbergThe Biggest Mistake in Investing: We generally use this communication to comment on the economies and markets,
3、but today wanted to make a brief comment on investing. The vast majority of investors (that probably means you) are making a huge mistake in their asset allocation. Investors do not have balanced portfolios. A typical portfolio has 60% of its dollars in equity and equity-like (i.e. private equity or
4、 venture capital) investments and, because these assets have more risk than the rest of the portfolio (generally nominal bonds), over 80% of a typical investors risk is in equities. The existence of nominal bonds and a scattering of other assets does very little to truly balance the portfolio becaus
5、e they make up such a small amount of risk. This over-investment in equities at the expense of other asset classes (nominal bonds, inflation indexed bonds, credit spreads, commodities) costs about 3% a year in expected value (which could alternatively be used for risk reduction), and dwarfs all othe
6、r issues that investors face. The mistake, once understood, is relatively easy to rectify. Yet, despite our pounding the table for a decade on this issue, only a tiny percentage of investors have moved significantly in the direction of truly balancing (i.e. in risk terms) their asset class exposures
7、 (we would balance them with respect to their performance in different economic environments). Here is what we think is preventing most of the investing world from taking the free lunch. Risk and Leverage Confusion: Most investors are familiar with typical portfolio math and they take assets as they
8、 are packaged (i.e. unlevered and with the risk/return characteristics offered in the market place). Many will use assumptions of risk, return, and correlation and create an “optimized portfolio” given their return target and the asset classes that are out there. To achieve their return targets, mos
9、t investors end up being “forced” into a portfolio dominated by the riskiest assets out there (equity and equity like assets). By simply injecting leverage into the equation there is no longer a need to be forced into equities. The following chart illustrates a typical expected return and risk scatt
10、er chart for asset classes as they come packaged in the market place (we got this from a consultant and it is probably similar to the ones most investors are thinking about). The basic relationship is clear and logical: higher risk assets are expected to have higher returns and the relationship betw
11、een risk and expected return is essentially linear (i.e. one unit of risk gets you one unit of return). 2 Bridgewater Daily Observations 8/19/2004 11%2%3%4%5%6%7%8%9%10%0%5%10%15%20%25%30%35%CASHDEF FIVENT CAPACT FIS/L IND FIEXT MAT FIINTL FIYLD EQCORE EQS&P 500VALUE EQINT FICORE FIINTL EQREAL ESTAT
12、EGROWTH EQSPEC EQ11%2%3%4%5%6%7%8%9%10%0%5%10%15%20%25%30%35%CASHDEF FIVENT CAPACT FIS/L IND FIEXT MAT FIINTL FIYLD EQCORE EQS&P 500VALUE EQINT FICORE FIINTL EQREAL ESTATEGROWTH EQSPEC EQOn the previous chart there are big differences between the return of different asset classes, but if you neutral
13、ize for risk (i.e. lever up lower risk assets, and delever risky assets) the differences between asset classes disappear. Leverage is the asset class equalizer. The following chart illustrates the expected returns (based on this typical consultant survey) of different asset classes. LEVERAGE ADJUSTE
14、D EXPECTED EXCESS RETURNS (STANDARDIZED TO S&P 500 RISK LEVEL)0246810121416S&P 500S/L INDEXINTL EQINTL FIVEN CAPREAL ESCASHCORE EQGROWTH EQSPEC EQVALUE EQYIELD EQACTIVE FICORE FIDEFENSE FIEXTEND MAT FIINT FIASSET CLASSEXCESS RETURNLEVERAGE ADJUSTED EXPECTED EXCESS RETURNS (STANDARDIZED TO S&P 500 RI
15、SK LEVEL)0246810121416S&P 500S/L INDEXINTL EQINTL FIVEN CAPREAL ESCASHCORE EQGROWTH EQSPEC EQVALUE EQYIELD EQACTIVE FICORE FIDEFENSE FIEXTEND MAT FIINT FIASSET CLASSEXCESS RETURNIf you do not constrain yourself by the fact that some asset classes have more risk in the way they are packaged than othe
16、r asset classes, then you would have no reason to select an asset class on return alone (as they are all essentially equal). Practically, what this means is that by leveraging up a treasury bond, for instance, you can create an asset with the same risk and return characteristics as equities. If you accept that in risk adjusted terms asset classes have roughly equivalent returns, you essentiall
