Victor Meets the Bogleheads: Comparing Static versus Dynamic Asset Allocation

Abstract

Most DIY index investors are attracted to static asset allocation, and most personal finance books are also advocates of a static approach to asset allocation. However, there are some strong logical and intuitive reasons, backed by academic research, supporting a dynamic approach to asset allocation. The reasoning behind a dynamic approach is that asset allocation should depend on the expected return and the riskiness of the assets being invested in, and on the individual's degree of risk aversion. Expected returns and risk change over time, and therefore, so too should one's asset allocation.  In this article, the authors explore the conditions under which investors would be justified in following the static asset allocation approach.

JEL Classification: C00, C10, C50, G00, G11