Since 2022, the global landscape has begun to evolve at an accelerated pace. A significant portion of investors have realized that under the unprecedented changes of the century, the traditional investment strategy relying on a single trend has enormous "unpredictable" risks.

For instance, over the past year, we have witnessed a series of "once-in-a-lifetime" events: gold has staged an epic bull market; Japanese stocks have gone from a downward circuit break to an upward circuit break in just a few days; and before September 24th, almost no one could have anticipated that the A-shares would exhibit a market that rises on a whim.

Against this backdrop, asset allocation, through diversified portfolio combinations, has reduced the necessity of predicting market trends, while demonstrating a stronger "anti-fragile" capability, emerging from the tide of an era dominated by uncertainty.

From the era of investment management to the era of asset management, and now to the era of asset allocation, as investors' consensus shifts from "expected return rates" to "star products," and then to "index funds," marked by the popularity of the CSI 500 ETF fund, "asset allocation + index funds" have become the answer and paradigm of this version.

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So, when the much-anticipated concept of asset allocation meets the hot CSI 500 ETF fund, what kind of sparks will they collide? Keep reading, and let's delve into it together.

01 The Charm of "Moderation" Equity-Debt Balance Strategy

"Do not go to the top of the mountain, nor stand at the foot of the mountain; from halfway up, the world is most beautiful." — Nietzsche

The concept of equity-debt balance originates from the profound insight of the investment master Graham, whose core lies in a "moderation" approach, skillfully "harmonizing" the positions of equity and fixed-income assets in a certain proportion.

In his classic work "The Intelligent Investor," Graham proposed a simple and efficient asset allocation rule: the 50-50 strategy, where stocks and bonds each account for half of the investment portfolio.

Among them, the position of stocks can be adjusted between 25-75% according to market conditions. At the same time, regular adjustments are made during market fluctuations to ensure that the ratio between the two remains constant, that is, "dynamic balancing."

When it comes to specific investment targets, the CSI 500 Index tracked by the CSI 500 ETF fund includes leaders from various industries, with a relatively stable historical long-term profit and high market representativeness. As a new generation of "flagship" broad-based funds, it is undoubtedly the best choice for equity asset allocation.

If we put the classic "50% stocks + 50% bonds" strategy into practice, using the CSI 500 Index as the representative of equity assets and the CSI Total Bond Index as the benchmark for fixed-income assets, ignoring the impact of transaction costs, the backtesting of the strategy over the past two decades is as follows:

From the backtesting results, the effectiveness of this strategy is self-evident, and the rebalancing operation at the end of each year is particularly crucial:

Not only does it increase the portfolio's annualized return from a "do nothing" 6.7% to 9.1%; but it also significantly improves the minimum return level that may be borne in extreme market conditions (from -50.1% to -24.3%).

What's more remarkable is that the strategy has also achieved a total return of 468.7%, even surpassing the performance of a fully invested stock index, reducing the maximum drawdown and "shock" while effectively amplifying returns.

The reason is that the core of "dynamic balancing" lies in selling assets with larger gains and replenishing assets with larger losses, which aligns with the principle of "mean reversion" and to some extent practices "contrarian operations, buying low and selling high." Even if the return rate is not the best in a certain period, it can better smooth the fluctuations and risks of the investment portfolio.

Further exploring the backtesting results of different stock-bond position combinations (rebalanced annually), we find that:

The "10% stocks + 90% bonds" portfolio achieved the lowest annual loss; while the "60% stocks + 40% bonds" portfolio not only achieved the highest annualized return but also maintained more controllable annual loss risk.

Of course, the above ratios are all based on historical data backtesting results. In actual operations, investors still need to set and dynamically adjust according to their target return rates and risk tolerance to gradually find the most suitable stock-bond position ratio, feeling the charm of this "compromise but not mediocre" approach.

02 The Power of "Simplicity" Core-Satellite Strategy

"Sometimes the simplest, most inconspicuous ideas, can change the world." — "Trillions Index"

The "core-satellite strategy" is also one of the mainstream strategies for index fund asset allocation. As the name suggests, we need to build an investment portfolio composed of core assets and satellite assets.

The essence lies in effectively matching two types of assets with differentiated characteristics, solidifying the core assets while using satellite assets to "explore new territories" and discover more possibilities. It is a "simple is the best" investment philosophy that can be achieved without complex mathematical models.

Among them, "core assets" determine the basic tone of the risk-return characteristics of the entire investment portfolio. We rely on core products to stabilize the basic position, which usually accounts for 70-80% of the position. Generally, the core is a product with moderate risk, pursuing relatively stable returns, and striving to win in stability.

On the other hand, "satellite assets" help us to achieve higher return targets, usually accounting for 20-30% of the position. Under the premise of appropriate overall risk, by increasing the exposure to specific risks or styles, we aim to achieve more flexible returns.

Generally speaking, core assets are expected to be the cornerstone of long-term holdings, while satellite assets need to be adjusted promptly according to changes in market style. However, the selection of core and satellite assets varies from person to person, with a thousand faces.

—For investors who pursue overall returns of the equity market and focus on obtaining higher returns in the medium and long term—

Consider allocating core positions to A500 and other core broad-based index funds to grasp the overall trend; at the same time, allocate satellite positions to broad-based index funds with greater elasticity such as the CSI 1000, CSI 2000, STAR 50, STAR 100, as well as industry-themed funds such as chips and artificial intelligence to capture opportunities in market fluctuations.

Of course, there must be a certain difference between funds to avoid being too similar in investment style or industry layout, avoiding a situation where all rise and fall together.

For example, the CSI A500 + CSI 1000 or CSI A500 + CSI 2000 in the figure below, is to use the A-share new generation "flagship" broad-based funds with a large market value style as the base position, and then appropriately match small or micro broad-based funds with low correlation and can benefit from loose liquidity, to achieve optimization and balance of the investment portfolio.

Figure: Correlation Analysis of Important A-Share Indices

(Source: Wind, period: daily line, statistical period 2014/11/21~2024/11/20)

—For investors who pursue relatively stable returns and expect to outperform inflation in the medium and long term—

Consider allocating the core part to bond funds to effectively control risk, while supplementing with satellite configurations of A500, CSI 300, and other broad-based index funds that are expected to rise in the long term to seek higher elasticity.

As shown in the figure below, assuming we allocate 80% of the core assets to the CSI Total Bond Index, and 20% of the satellite assets to the A500 Index. Even without considering any rotation adjustments:

This simple configuration of the portfolio can still achieve an annualized return of 7.2%; and in a less favorable situation, the maximum drawdown of this portfolio is also "fixed" at around -11%.

(Source: Wind, backtesting period 2004.12.31-2024.11.9. This backtesting uses the CSI Total Bond Index as the core asset, with a position of 80%; the CSI A500 Index as the satellite asset, with a position of 20%. Starting from December 31, 2004, dynamic rebalancing is performed at the end of each year, adjusting the core and satellite asset positions to the initial ratio. Annualized return = (1 + total return)^(1 / total number of backtesting years) - 1. The historical performance of the index does not predict future performance and does not represent the performance of the fund product.)

Compared to the ups and downs of the equity market itself over the past two decades, this performance undoubtedly greatly "dampens" the waves that may be experienced in the investment process, endowing the entire investment portfolio with good characteristics of "both offensive and defensive," which is a "simple" power.

After discussing backtesting and data, let's finally talk about the market.

At the end of each year, for every investor, from summarizing to reviewing, and then discussing the investment strategy for the next year, has become an indispensable "ritual".

Over the past years, when we looked forward to the next year, we always seemed to observe some clues and opportunities on paper. However, standing at this point, although some major macro events have been settled, the global macro situation is still brewing.

Looking forward to 2025, there are still many mysteries ahead that have not been revealed, and there are many unfinished stories worth waiting for.

In fact, in a low-interest-rate environment, high-quality assets are scarce, and with the ups and downs of the domestic and international environment, it is precisely when asset allocation can exert its effectiveness. Because asset allocation itself is a plan to find certainty in uncertainty, a bottom-line thinking is based on both offensive and defensive.

"No person has a good day for a thousand days, and no flower blooms for a hundred days." The meaning here is to remind us to properly allocate between markets, assets, and themes, protecting ourselves on one end while sowing hope on the other. Finding the rare balance between risk control and potential returns allows us to strive to benefit from uncertainty. No matter how turbulent the winds and waves are, let them rise high and crash.