When advisors plan to update their asset allocation models, it is very important to align the expected risk and return of the asset classes with a similar market environment from a previous historical period. The period also should be aligned with the cyclical bear or bull market . The problem is that if the asset allocation model is based on the historical return over random periods such as five, ten, or even 15 years, the expected rate of return will not be realistic.
The asset allocation model is based on three important statistics: risk, return, and correlation of the asset classes. In the secular bull market, these three statistics are stable and predictable, but in the secular bear market, they are unstable. Any analysis based on these statistics in the secular bear market without taking into consideration the current market cycle and the projected return will be far from the reality of the actual return.