Greg Davies and Arnaud de Servigny offer a different take on
diversification in their book Behavioral
Investment Management: An Efficient Alternative to Modern Portfolio Theory.
Chapter 6, “Representing Asset Return Dynamics in an Uncertain Environment was
the most interesting chapter to me, and the one that adds confirmation to
using the ABCT as a guide to timing the market.
Modern portfolio theory tells investors to diversify their
portfolios at least between two asset classes, stocks and bonds. A simplistic
summary of the method is to use the statistical measure called standard
deviation to assess the risks of asset classes and diversify according to risk.
But in reality, advisers have found that a fixed ratio, say 70% stocks and 30%
bonds, often works better without requiring as much work.
