By David M. Darst
Reviewed by Gary W. Silverman, CFP®
Gary owns a fee-only financial planning firm in Wichita Falls, Texas. He is the editor of the financial newsletter Personal Money Planning, and writes the newspaper columns Your Money and Biz2Biz.
As I began reading this book, I realized that the main tenet was going to be: "don't put all your eggs in one basket." The book promised to explore how asset allocation is employed by using diversification, rebalancing and risk management to accumulate, compound and retain wealth.
"This is great," I thought. I was imagining a short text written for the layperson that condenses and simplifies the type of information found in Roger C. Gibson's Asset Allocation. Sure it was a little book, but little books can teach a lot about becoming wealthy and staying wealthy, like George S. Clason's The Richest Man in Babylon. So with great expectation I began reading what I hoped would become a new classic.
I was greatly disappointed.
There is a series of The Little Books. The subtitle of this one is: What the Rich Do to Stay Wealthy in Up and Down Markets. It's written by David Darst, CFA, a managing director of Morgan Stanley where he serves as chairman of the asset allocation committee and chief investment strategist of the global wealth management group. In other words, he lives and breathes asset allocation every day.
As expected, the book wasn't written to the financial adviser, but is aimed squarely at the public. Darst takes the reader through the evolution, process and reasonable expectation of asset allocation. "Reasonable" is one of the keys. He writes: "There is no magic formula to asset allocation. As with any human endeavor that has a lot of art in it, patience, perspective, curiosity and emotional intelligence should be your steadfast allies."
Unfortunately, in addition to not having a magic formula, the book also provides no real aid to an investor trying to figure out what the wealthy do to stay wealthy in up and down markets.
Rather, Darst talks around building the asset allocation model, whether to use mutual funds, limited partnerships or individual securities. Nothing said would bring the average investor closer to knowing what to do.
One chapter discusses asset classes and the cycles of the market. On display is an asset allocation clock that shows what asset classes to emphasize and de-emphasize during the four parts of a market cycle. How to determine what market cycle you are in, how to shift asset classes, how much of an asset class to use ... that's all a bit fuzzy.
Later on, several charts are given to show the advantages of various asset classes and to help you pick which to use, depending on your investment objective. How this relates to his asset allocation clock is not apparent. Frankly, a lot of the information in the charts doesn't make a lot of sense.
For instance, in the chart showing advantages of different asset classes, high-yield debt and emerging-market debt apparently have no advantages (at least none are checked). In the disadvantages chart, U.S. Fixed Income, U.S. Short-Term Debt, and High-Yield Debt have no disadvantages. In the investment objective chart, under the objective of "cash flow," I see that emerging market stocks get a check mark while high-yield debt does not.
Reading through the book reinforces that asset allocation still has a lot of art to it. But individual investors are left wondering how to mix the pigments and how to apply them. The book is filled with phrases like, "you probably want to consider," "a portion of your money should go," and "you might want to decrease." None is followed up with examples that would help the reader apply the techniques.
For instance, while private equity, managed futures and hedge funds are mentioned, there is no guidance as to where our common investor would search for these. The chapter on strategic versus tactical asset allocation comes down to this: do both. Exactly how to do this remains a mystery.
Then there is Uncle Frank.
A main point of the book is for the investor to seek out an "Uncle Frank." This is someone who has experience, is successful, has your best interests in mind, and can see your strengths and weaknesses.
"He is market-savvy and knows when you should press your advantage with a successful investment and when to cut your losses with an unsuccessful one," the author writes.
In essence, Uncle Frank is someone who has his investment act together and who acts as your mentor.
I agree: an individual investor would be greatly served by finding an Uncle Frank who is willing to work with her (preferably for free). How do you find your Uncle Frank? He's apparently hiding with the rest of the useful information ... outside the pages of this book.