Practical Applications of Buy-and-Hold and Constant-Mix May Be Better Allocation Strategies Than You Think

In Buy-and-Hold and Constant-Mix May Be Better Allocation Strategies Than You Think, in the June 2020 Multi-Asset Special Issue of The Journal of Portfolio Management, Thomas J. O’Brien of the University of Connecticut discusses the relative practicality and utility of various basic multiperiod allocation strategies. Applying a three-period binomial model, O’Brien calculates how much anticipated future wealth investors might forgo from following simpler portfolio-management strategies such as buy-and-hold or constant-mix, instead of a more complex optimal reallocation plan. He also determines which fixed-income vehicles would better suit which investors. By making assumptions about equities and interest rates in his analyses, O’Brien derives conclusions about the best allocation and fixed-income strategies for investors with differing risk thresholds. He finds that in an environment where equity mean-reversion and interest-rate uncertainty prevail, investors can pursue either buy-and-hold or constant-mix portfolio strategies without incurring much economic cost. Investors’ preferred allocation strategies and fixed-income approaches should be guided by their risk tolerance. The more risk averse would opt for a constant-mix allocation strategy paired with horizon-maturity fixed-income instruments. More-risk-accepting investors would apply a buy-and-hold allocation strategy coupled with a sequenced series of shorter-term bills. TOPICS: Portfolio management/multi-asset allocation, portfolio theory, portfolio construction