The Asset Allocator

Fritjof Capra (born 1939) is an Austrian-born American physicist, systems theorist, and author of five international bestsellers. Capra is a founding director of the "Center for Ecoliteracy" in Berkeley, California.

In his book "The Turning Point" (1982), Capra talks of Living Systems.

A system of people for example, is a Living System.

Let us now consider the FINANCIAL PORTFOLIO. This portfolio has our emotions invested in it and therefore can be called a Living System. And a Living System cannot function properly if its body parts are out of synch. with each other.

Financial Portfolio as a Living System: Finances are an emotional affair. They cannot be anything else. There are heavy emotions associated with each occurrence of profit, or loss.a A person handles finances according to his personality, therefore his/her financial status mirrors his personality.

^aGreg Schnell of STOCKCHARTS writes:

One of the major traits of a bear market is the whipsaw of emotions that one experiences when in a bear market. Gut wrenching drops with sizzling rallies. The market rallies on bad news, it rallies on good news, it falls on good news, it falls on bad news. It seems almost chaotic.

___________________

And now some basic asset management approaches:

Do not time the market without the help of refined tools and considerable understanding.

It is very difficult to time the stock market, otherwise it would be too easy to make money. However, there are well defined disciplines to investing that over the long run of the market can provide reasonable returns.

Proper asset allocation could optimise returns.

For example, the ICICI Asset Allocator. More details on Asset Allocation: Get Rich Slowly. MoneyControl Asset Allocator: Asset Allocator. Here is another Asset Allocator: Asset Analysis. Article on Market Pressure & Risk Management: Safe Haven.

Here is what MPT (Modern Portfolio Theory) -- has to say:

"The fundamental concept behind MPT is that the assets in a portfolio should not be selected individually, each on their own merits. Rather, it is important to consider how each asset changes in price relative to how every other asset in the portfolio changes in price."

This would suggest that the healthy financial portfolio is one in which a decision depends entirely on what the portfolio needs to stay healthy, and not on the attractiveness of the individual instrument.

The ideal portfolio is one in which not every instrument pulls in the same direction at the same time.

Summary The financial portfolio is like a living organism which should not be fed too much of any one thing. A complete, healthy organism has all types of body parts, and requires all kinds of food, tasty or not. The healthy financial portfolio has all sorts of aspects, even the slow ones. Just like a living organism, the financial portfolio may require very bitter medicines...or amputation, when it starts falling ill. Bad instruments must either be treated, or be done away with, as quickly as is possible. There is a growing belief that for the average person, focus should be correct asset allocation, and nothing else.

The Portfolio as a "Living System" continued...

Every well diversified financial portfolio could be said to be the microcosm of the entire world economy. Its big picture will be the big picture of the entire world economy. Which may not be too good - but it is certainly more balanced than an imbalanced portfolio that is focused on 'too much of any one thing'.

The Investment Portfolio as a "Living System" would mean that it would follow the 'Self Organising Principle'. As long as the owner of the portfolio keeps a track of things, and balances it periodically. Keeps it dynamic.

The following is from Wikipedia:Self-Organisation:

In economics, a market economy is sometimes said to be self-organizing. Paul Krugman has written on the role that market self-organization plays in the business cycle in his book "The Self Organizing Economy". Friedrich Hayek coined the term catallaxy to describe a "self-organizing system of voluntary co-operation," in regard to capitalism.

More on Self Organisation:WN.COM