Any of your bog-standard investment processes today are centred on the idea of asset allocation: that is, your investments should be spread around a number of different assets according to some kind of logical plan.
The dominant idea that emerged after years of academics tinkering with formulae is termed strategic asset allocation (SAA). Under SAA, your investments would be split between asset classes (usually shares, bonds, cash and property) in proportion to the amount of risk you wanted to take where risk was the probability, based on historical records, that the asset class in question over a given time period would suffer a loss.
The SAA model assumed that over the long-term each asset class, whatever short-term performance fluctuations, would revert to historical type. Therefore, all you had to do was to determine your risk level, set up your asset allocation and periodically rebalance the actual investments (which tend to drift over time) so they stuck with the SAA plan.
If you hung around long enough, the SAA gospel went, all assets would give the returns suggested by their historical averages.
In recent years, however, high-level investment thought-leaders have begun to question the assumptions underpinning SAA, with its 'set and forget' model increasingly under threat. Some critics argue that while the SAA mean-reversion rule remains sound, unfortunately its 'long-term' might be a little too long for the average human life-span. Others dismiss the concept altogether, arguing investors are more or less in constant chaos management mode with history an unreliable guide to the future.
