But risks are not just volatility: they are what you don’t know about.” Chhabra has developed an investment framework in the past 10 years that guides the endowment at the IAS. The essence of his strategy is to separate the portfolio into different pools that reflect return objectives, even though they have different risk profiles. As an endowment manager, his major aim is to be able to write a cheque when the institute wants it, to not be in an arms race with other endowments for returns or achieve the highest quarterly returns. “The market over the long term will give you a pretty good return, create a basic safety net, but it doesn’t know your particular situation,” he said. Chhabra observed that when asset bubbles arose, investors were sucked into the thinking there was serious money to be made. This motivated him to explore the precise results of what aggressive asset allocation moves do to wealth. In a paper he co-authored with Ravindra Koneru and Lex Zaharoff, to be published in the summer edition of the Journal of Wealth Management, called Modern Portfolio Theory’s Third Rail: Achieving Wealth Mobility Through Idiosyncratic Risk, quantitative arguments are used to explore how changes in an investor’s relative wealth position in society can be achieved.
The authors conclude that if an investment strategy was limited to well-diversified, underlying portfolios along the efficient frontier, it would take almost 100 years to materially change an investor’s relative wealth. The analysis looked at the data of different socio-economic groups in the US, their overall asset allocations and the number of years and type of extreme changes it would take to move a family into a different percentile band. “We looked at the asset allocation of a 75th percentile family and a 90th percentile family, and it would take about 100 years for them to catch up. Wealth mobility doesn’t come from an aggressive asset allocation. It only comes from strategies.” The most effective strategies to achieve wealth mobility are: owning businesses and reinvesting in companies, personal finance, marriage and inheritance, and real estate.