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Asset Allocation: Still a Prudent Strategy
By admin

In recent weeks I have come across several personal financial planning columns and articles that have provoked me to wonder, What are these people thinking?

There’s an article that goes on at great length about the opportunities and dangers of investing in emerging markets.  Another argues that bonds are about to enter a bear market.  One column seems to suggest that investors should be trading currency futures.

Economists and investment advisors are engaged in a great debate as to when a new era of high inflation will dawn.  There is much speculation on how high the price of gold will rise.  

I suppose it is interesting to many, but I can’t help but feel that most investors are not well-served by the financial media.  The truth is that no one really knows how the inflation/deflation scenario will play out, how the price of gold will fluctuate, not to mention emerging markets, bonds, currencies, etc.

Despite all that has happened in the economy and in asset prices over the past year or two, there is nothing I have seen that has persuaded me that traditional asset allocation no longer works very well, or that there is a better approach to portfolio management.

Certainly, portfolio management theory and practice will continue to evolve and improve.  Better risk management techniques are always under development, and some will undoubtedly find their way into many reputable investment advisory practices. But the process is iterative. 

In my opinion, advisors or investors seeking to improve a portfolio by trading currency futures, speculating on gold, loading up on emerging markets stocks, or betting on inflation/deflation scenarios, etc., are asking for trouble.  But for investors who are simply compelled to adopt a new approach, I would urge that they introduced new approaches sparingly and incrementally.

And speaking of incremental changes…

For investors and advisors who plan to stick with a traditional asset allocation but are considering adjusting the stocks-to-bonds ratio,  I believe that modest, gradual changes are preferable to sudden, major changes.

For example, I suspect that many investors have come to appreciate that stocks are riskier than they had thought, and as a result of this new knowledge, they are considering reducing their allocation to stocks.  This may be especially true for older investors who are nearing retirement or who are already retired.

With the S&P 500 Index up more than 55% from the March lows, it may be a good time for these investors to meet with their advisors to discuss possible changes to their portfolio.  For most, a minor change in asset allocation will probably work well.  But a major change, such as moving from mostly stocks to mostly bonds — or vice-versa — is rarely a good idea.  Even if such a drastic move happens to work out well in the short term (which, if it does, is a function of luck and not clairvoyance) acting in this way sets the stage for future similar moves, and the odds are against successful repetition of this approach over time.

Sometimes, even prudent, well-designed strategies encounter unanticipated problems. Forced into recovery mode, the wise person examines what went wrong and what changes to make (if any), and is slow to embrace novel, exotic solutions.  Adjustments should be deliberate, not hurried.  If the original plan was designed well, any adjustments should generally be minor in scale and scope. Recovery will take time; be patient.


R. Kevin O'Keefe, CIMA®, AIF ®

Chief Investment Officer


Posted: September 30, 2009