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Cycles and Asset Allocation-Key Investment Decisions

This Discussion Paper concludes the series devoted to our market analysis framework. The three previous papers demonstrated the existence of long cycles, which last approximately 50 years and can be divided into four parts, named according to the seasons: spring, summer, autumn and winter. These long cycles contain shorter cycles—lasting several years that correspond to our day-to-day reality—that they influence via the monetary policies of central banks. These consistent patterns provide us with valuable lessons, and have enabled us to create a roadmap for interpreting the behaviour of assets.

In this paper, we will discuss how we can use this roadmap—in other words, how to balance one’s wealth or financial portfolio in accordance with this approach. To do so, we have established asset allocations (for equities, bonds, money market instruments, gold and real estate) on the basis of our historical observations and carried out simulations over a period of more than a century. Because 90% of the fluctuations in returns on a diversified portfolio depend on the way the portfolio’s assets are allocated1, this matter deserves particular attention. Whether conscious or implicit, every investor must decide on an asset allocation.

All investors share two key concerns: protecting their long-term purchasing power, and not losing any of the nominal value of their investment over the short term. Managing wealth or a financial portfolio requires making decisions to address these concerns. This involves two fundamental approaches: strategic asset allocation, to meet long-term objectives, and tactical allocation, to make the most of opportunities in the shorter term.

First, we will set out our strategy for these two complementary approaches, looking at the United States, France, the United Kingdom and Japan. Then, we will examine how to take into account investment horizon constraints and how to manage changes in economic regimes, i.e., the transitions between the economic seasons.


1 Brinson, Singer and Beebower (1991), Ibbotson and Kaplan (2000).

MIJOT Eric , Head of Developed Markets Strategy Research

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Cycles and Asset Allocation-Key Investment Decisions
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