Asset Allocation

Adding more Stability to an asset allocation isn’t an easy issue. It takes science to know how much bonds you need. It takes artistry to gradually adjust your asset allocation over time. 

I recently received the following paraphrased questions from a prospective client and here were my replies.

When reviewing our Foreign allocations, we discovered that the foreign Health Care sector has shown high risk-adjusted performance.

We believe that holding on to Energy and waiting for it to recover might mean missing out on greater gains elsewhere.

While an efficient frontier graph cannot hand you a perfect asset allocation, it remains a useful tool in analyzing what the past can tell us about a wide variety of investments.

We decided to add two new sectors after generating several hundred efficient frontier graphs of various United States classifications, industries, and sectors over a variety of time periods.

In our age-appropriate asset allocation models, we don’t recommend a 60/40 portfolio until you are between age 80 and 87.

Each of us either has a withdrawal rate or a savings rate, as we are each either contributing to or withdrawing from our invested accounts.

While the appreciation allocation helps you achieve your financial goals, introducing a stability allocation into your portfolio can prevent your portfolio from running out of money.

The fact that you are worried enough to ask might mean that now is a good chance to take stock in your investment strategy.

A stability allocation has two purposes: to meet withdrawal needs and to move the portfolio more conservative (less risky) by dampening the volatility of stock returns.

We believe that this mix of funds should provide a timeless allocation for the HSAs of University of Virginia employees.

Diversification among many different countries provides a more consistent return than investing entirely in the United States.

Your asset allocation matters to maintaining a balance in retirement of having money for the next 5 to 7 years and keeping up with inflation for time periods of 8 years or longer.

In 2009, David Marotta wrote a five-part article series for the Charlottesville Business Journal covering basic investment strategies. Its advice is still relevant today.

Asset classes are best defined by looking at the correlation of their returns. These four 2015 articles take a close examination at the three appreciation asset classes.

We continue to believe that diversification among many different countries provides a more consistent return than investing entirely in the United States.

Some performance is cause for concern. Other times, you need not worry. Here are 5 times you should not worry and 4 cases when you should.

These market returns panicked some investors. However, those emotions are unhelpful. Long term investing erases all this short term volatility. It is always a good time to have a balanced portfolio.

“My greatest regret is not being able to convince as many investors as possible of the difference between real risk and phantom risk.”

There are always those who discount the power of having a diversified portfolio in favor of putting everything in whatever is going to go up the most.

A blended portfolio has had a higher mean return than either fund by itself.

An article in the Wall Street Journal questions the value of regular rebalancing, but regular rebalancing is a key component of modern portfolio theory.

Even very volatile investments may, in moderate amounts, reduce a portfolio’s volatility if the investment is not correlated with the rest of the portfolio’s components.

There are reasons to have the stability of fixed income investments for a portion of your portfolio, but switching to bonds because you are afraid of stocks is not one of them.

You can’t invest for the future in the future. Don’t let your fear of the future ruin your future.

You are unlikely to need funds for any long-term care episode until about age 85. Given the long time horizon, we suggest investing your HSA for appreciation.

When you use a bond laddering strategy with funds, rebalancing to your asset allocation naturally buys and sells bond funds as appropriate.

An advisor’s job is to recommend the optimum asset allocation regardless of how the client might answer a survey about risk tolerance.

The rough idea is that the stock price of companies that are profitable are more likely to appreciate than companies which are not profitable.

Factor investing “tweaks the idea of asset allocation and diversification by seeking out types of securities that have been shown, by decades of academic research, to offer positive return premiums over time.”

It can be easy to forget about your company’s 401(k) because you aren’t depositing the money yourself, your pre-tax contributions are deducted from your paycheck and are electronically deposited by your employer.

Two rules of endowment investing: 1) Keep an equity bias and 2) diversify.

There are at least five reasons to hold cash. Without a good reason to hold cash, you may be holding too much.

Purchasing investment products in isolation from the larger context of your specific situation is like pushing random buttons on a vending machine in order to provide a Thanksgiving dinner for your family.

Apparently the idea behind asset allocation is more complex than they think.

Recency bias is perhaps the most difficult natural bias to overcome.

“Historically there has been a wide variety of returns from US and International stocks, and when one does poorly often another does well.”

This is a summary of the six steps required to create a well-crafted investment plan.

The University of Virginia plan includes funds sufficient to produce these excellent portfolios.

Age appropriate asset allocation for 2016 using the choices available in the University of Virginia’s Fidelity 403(b) Tax Deferred Savings Plan (TDSP).

Age appropriate asset allocation for 2016 using the choices available in several of the University of Virginia’s Fidelity Retirement Plans.

Here is a review of Marotta’s 2015 Vanguard Gone-Fishing Portfolio and a description of our changes for 2016.

The gone-fishing portfolio provides suggested asset allocations for investors up to age 70 and up to $1 million.

While many investors say they want a low-correlation portfolio, they don’t want to actually experience a low-correlation portfolio.

The process of defining your sectors is an attempt to identify the quintessential features of your strategy and formalize your selection criteria.

Resource stocks represent one of the most interesting collections of diverse indexes as they do not always move in sync with one another.

It is good to take the two categories which are most similar and use them as underlying sector divisions within the same larger asset class.

The value of not running out of money when making withdrawals cannot be measured.

See our review of the two pros and nine cons of how Schwab monitors and rebalances portfolios.