This month we are going back to the basics with a refresh­er on the top­ic of asset allo­ca­tion.  If you are not an invest­ment advi­sor, it may be a term you are unfa­mil­iar with, espe­cial­ly if you don’t engage with an advi­sor to man­age your assets.

You won’t hear asset allo­ca­tion dis­cussed much on CNBC and you prob­a­bly won’t find it to be the top­ic of a Yahoo! Finance arti­cle.  It’s not an excit­ing or “sexy” top­ic and there­fore it doesn’t sell.  The lat­est hot stock, the end of Europe as we know it, and “What’s going on with Face­book?” are what sell news and dri­ve many to make invest­ment deci­sions.

Unfor­tu­nate­ly asset allo­ca­tion should be the cor­ner­stone of any invest­ment deci­sion.  A prop­er strat­e­gy can help you meet your goals regard­less of if a stock is hot or not.  The con­cept is very sim­ple.  Just as the old say­ing goes, “Don’t put all your eggs in one bas­ket”.  That’s what asset allo­ca­tion is all about.

Say for instance you get a hot tip on a stock and place your retire­ment fund in it.  If the news turned out to be bad and the com­pa­ny went bank­rupt, you lose – every­thing.  But, if you thought the hot tip had some valid­i­ty to it, maybe you put 5% of your retire­ment in it.  Then if the news was bad, you may be behind, but you still have 95% of your retire­ment.

Asset allo­ca­tion is about spread­ing out your invest­ment port­fo­lio amongst a num­ber of dif­fer­ent asset class­es to cre­ate a man­aged and effec­tive way to reach your goals for that port­fo­lio.  Large cap stocks, small cap stocks, cor­po­rate bonds, com­modi­ties, and real estate are all exam­ples of dif­fer­ent asset class­es.  Some move sim­i­lar­ly to oth­ers, some move in com­plete­ly dif­fer­ent direc­tions.  This con­cept is the “cor­re­la­tion” of the assets class­es.  The idea here is that no one bet will sink your invest­ment plan and it’s very like­ly that in almost any time peri­od one of your asset class­es will be per­form­ing pos­i­tive­ly, or at least help­ing main­tain some sta­bil­i­ty.  A top per­form­ing asset class 1 quar­ter, might be at the bot­tom the near future as the fol­low­ing chart illus­trates.

Mack­ey Advi­sors™ invest­ment port­fo­lios usu­al­ly con­tain any­where from 10 to 15 dif­fer­ent asset class­es.  The weight­ing put on each class is depen­dent on a vari­ety of fac­tors; expect­ed short & long term per­for­mance, the glob­al econ­o­my, his­tor­i­cal sec­tor move­ment, cur­rent phase of eco­nom­ic expan­sion or con­trac­tion, are just a few of the fac­tors that might help deter­mine if “large-cap growth” stocks are 5% or 15% of an invest­ment port­fo­lio.

Each asset class also has a cer­tain amount to volatil­i­ty asso­ci­at­ed with it.  If you are clos­er to reach­ing your goal for a spe­cif­ic port­fo­lio, or just don’t like your invest­ments chang­ing rapid­ly, the basis for your asset allo­ca­tion might be how much to have in stocks and how much to have in bonds.  If you are draw­ing income from the port­fo­lio, this is also a fac­tor.  Once you decide this split, then you can work and decide where in stocks and where in bonds you should be.

The chart below is a tem­plate some peo­ple will use to help under­stand what asset class­es to con­sid­er and how to split things up.

Of course to be a suc­cess­ful “do it your­self-er”, it is impor­tant to stay on top of news and make changes to your mod­el.  As time changes one asset class will go out of favor vs. anoth­er and will need to take up a less­er port­fo­lio of your mod­el.  As your port­fo­lio moves, what you said should be a 5% expo­sure to real estate might become 10%.  Rebal­anc­ing will keep your desired mod­el in bal­ance and make sure you are buy­ing and sell­ing when you should and not when your emo­tions tell you.

So I hope that wasn’t too bor­ing or too intense, and hope­ful­ly you will find it help­ful as you work with your advi­sor or nav­i­gate the man­age­ment of your own port­fo­lio.  This one of our core com­pe­ten­cies at Mack­ey Advi­sors™ and while we aren’t in the busi­ness of too much free advice, we would be more than hap­py to sit down with you, learn about you, and explore how port­fo­lios can be built to achieve the dreams you always want­ed.




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How to Invest Lead­ing Up To — and In — Retire­ment

A Sim­ple For­mu­la to Achieve your Goals

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