The Problem with Asset Allocation - By Jerry Black
The title of this blog may already have you wondering what I’m suggesting. Yes, there is a problem. Before I tell you the problem, I’m not going to suggest we throw the baby out with the bathwater. Asset allocation is a prudent principle to apply to your portfolios. Dividing one’s portion to seven, perhaps eight, or more is deemed advisable. None of us knows the winds of misfortune that may blow our way, much less when they will occur. The markets and our lives carry so many ups and downs. One problem with asset allocation is that there are many ways in which we can diversify. There are strategic and tactical asset allocation model portfolios. Their proponents argue year in and year out as to which is best. Not much has changed in my 40 years of analyzing investments. There are also many asset types, stocks ranging from small to large companies, US to International, value stocks, and growth stocks. Then there are bonds of all sizes and flavors as well. Then there are various sectors of the economy some will say we can diversify among and sector rotation analysis can be employed to determine which sector(s) of the global economy to invest in based upon those sectors most likely to perform best. Examples of sectors would be technology, healthcare, consumer non-durables, financials, etc. Here’s another problem with asset allocation. A well-diversified portfolio consisting of small to large companies, value stock and growth stocks, US and International, and bonds will never outperform the best asset class in any given year. Typically, a well-diversified portfolio consisting of about 65% equities and 35% bonds falls somewhere in the 45th to 60th performance percentile (meaning somewhere in the middle) when compared to the best to worst performing individual asset classes. Herein lies the real problem: How we compare our own portfolio to those other asset classes, the market(DJIA), or other styles of management at any given point in time. Proper asset allocation essentially guarantees your portfolio may not be the best or worst when compared to individual asset classes over certain periods of time. The more return you desire over the long term usually requires you to have more equities and less bonds. To best understand the best allocation mix for you, give us a call.