Does Asset Allocation Need A Facelift?

Does asset allocation need a facelift? YES. The fact that the question is asked more & more indicates that the belief asset allocation is dead (assuming it ever lived up to its claim) is there, but what next? How many artiles, studies or stories that challenged the traditional approaches were published prior to 2008? Very few. 2 years ago articles along this subject were never given a second look. Now, they appear more often and offer a much greater review (or criticism) of the theory that is now showing its limitations.The truth is, asset allocation never provided the risk reduction that it promised. Unfortunately, there was enough 'bull' in the market to hide the underlying problems. The traditional approaches [asset allocation, diversification & MPT] have failed. 2000-2002 was a warning shot and 2008 confirmed it.[quote]It is important to note that the great claim of 'asset allocation' relates to the risk reduction achieved by diversifying over several broad asset classes (i.e. stocks, bonds, cash and real estate) without a similar reduction in return. However, the risk reduction is strictly theoretical (typically based upon relationships that existed over a particular period with no guarantee that these same relationships will continue in the future). This is the crux of where asset allocation or modern portfolio theory breaks down. Risk is not defined; instead it is merely expressed in historical standards.- Randy Swan, 1997[/quote]