What is Adaptive Asset Allocation?

In 2024, we introduced the Geoeconomic Model Investment Portfolio for investing in a changing world. For members interested in learning how our allocation engine differs from the allocation based on an investor's self-assessment of risk-tolerance, this one is for you.

We begin by exploring a rhetorical question posed by Howard Marks in his series on How to Think about Risk. Many investors believe that riskier assets automatically produce higher returns, but Marks observes, "If it were true that riskier assets produce higher returns, then they wouldn't be riskier, would they?"

Think about it; if riskier assets always produced higher returns, they would become less risky by definition. This paradox reveals the flaw in the original assumption that is based on a misinterpretation of the risk-return tradeoff concept in finance. As Pim van Vliet put it in High Returns-Low Risk Paradox,

Most cases, you take risk, you don't get the reward, and that's an important lesson also for starting investors who think that risk is like Karma: you take risk and then you get the return. That's not the case.