A Century of Asset Allocation Crash Risk

Abstract

We extend proxies of the main asset allocation approaches back to 1926 using long-run return data for a variety of sub-asset classes and factors and test the long-term performance of U.S. and Global 60/40, Diversified Multi-Asset, Risk Parity, Endowment, Factor-Based and Dynamic Asset Allocation portfolios. While Factor-Based portfolios exhibit best traditionally measured risk-adjusted returns in the long run, the Dynamic Asset Allocation reduces the abandonment risk due to its lower expected drawdown. Across all strategies, risk-tolerant investors that rely on the longer history for setting their expectations, experience significantly better outcomes, particularly if their investment horizon includes times of crisis.

Keywords: Behavioral Finance, Risk Aversion, Investment Outcomes, Dynamic Asset Allocation, Risk Parity, Factor Investing, Endowment Model, Market Downturn, Drawdown

JEL Classification: G11, G12, G17