Asset Allocation
One of the most important decisions in investing is Asset Allocation. However, most financial industry professionals advise a static allocation—a certain percentage of stocks, bonds and other securities—based on factors such as your age and target retirement date. This is a first cousin to a buy-and-hold philosophy.
Most asset allocation models are constructed as an "optimal, all-weather portfolio” for the future. However, a portfolio for all seasons may not be right for any season! Should your mix of investments be done dynamically—based on the conditions of TODAY’S market?
What About Bob?*
Bob lives in Nashville, TN. Since Bob is smart and disciplined, he knows that the average yearly temperature in Nashville is 59.4 degrees Fahrenheit. Therefore every day Bob gets up and dresses in a light sweater and a windbreaker, apparel appropriate for 59.4-degree weather.
Bob doesn't get discouraged during summer, when daily temperatures easily reach into the 90s with humidity in the upper 80s. He still wears a sweater and jacket everyday. Even though he sweats a lot and sometimes passes out from heat exhaustion, he knows the average temperature is 59.4 degrees.
Bob is smart and disciplined. He doesn't get discouraged in winter. When temperatures frequently dip into the 20s, Bob still dresses for the average temperature of 59.4 degrees. Even though he occasionally gets hypothermia and has to be taken to the hospital, he knows the average temperature is 59.4 degrees.
Bob uses the same philosophy for his investments that he uses for his choice of wardrobe. Bob is a very “smart and disciplined” investor. He doesn't get discouraged when his asset allocation model tells him to
be in small caps for years while they under-perform, only to reduce his small cap exposure at some arbitrary calendar date—just before they begin to perform well. He knows he has an “all weather portfolio.”
None of us would dress like Bob. Why should we invest like Bob?
*This example is for hypothetical purposes only. Asset Allocation does not guarantee a profit. Loss still may occur, including loss of principal. (DUH!)
Eating Your Pie Chart and Having It Too
If you were 10 years from retirement in 1949, should you invest with the same allocation as you would if you were 10 years from retirement in 1979, 1999 or 2009? (In 1949, there were no cell phones, no PCs, Microsoft was 30+ years from going public and CDs were still something you got at the bank, not at the music store!) And yet, many are still parading the modern portfolio theory of asset allocation (based on research done in the 1950s) as though it is asset allocation fact.
So what’s the answer for you? A static allocation that most individuals use or a more tactical approach? Ultimately, you have to decide for you.
As for me, I believe all professional financial advice should be delivered in the context of a client’s values, goals, current financial reality and with a comprehensive, written, lifetime financial plan of action that is dynamically updated to deliver the highest probability of achieving those goals.
Changes
We started in 1997 as an investment brokerage company. Understanding that we can’t be all things to all people, we radically changed our business model since then to focus on serving a limited number of families at a high level and doing true comprehensive financial planning. This includes making sure a checklist of 100+ items is checked off so our ideal client community can declare themselves “financially together.” To more accurately reflect what we do, we have dropped “investment group” from our name to not cause confusion.
Our new website is www.luken.pro (notice “.pro” and not “.com”). Our email addresses can be found on our new and improved website.
*The Opinions expressed herein are those of Gregory Luken, Financial Advisory, Investment Advisor Representative and Registered Principal of SII, and not necessarily those of any company with which he may be affiliated. This newsletter is provided for information purposes only. It is not a solicitation to buy any product or service. All information herein contained is gathered from sources believed to be accurate but is not guaranteed. Reproduction in any form without prior written permission is expressly prohibited.
