Investment Guy

I’ve said it before and I’ll say it again- Asset Allocation.  It’s the best way to invest.

I often feel like a broken record, but I believe in AA more and more every day.  I’ve been utilizing AA since 2003.  Before international and emerging markets were in vogue.  And when nobody wanted to own large cap us stocks.  And before metals were the flavor of the day.   It’s not going to be a silver bullet, because you will also own the worst performing asset class.  But it reduces risk, and that is my goal.

Asset allocation is not dead, as some people contend.   I am not going to look into a crystal ball and tell you what the future has in store.  I will be the first to admit that I don’t know what the best investment idea is for today’s current economic environment.  Earthquakes and tsunamis and nuclear reactors are certainly going to have some impact on the market.  So will the credit crisis of 2008-09.  And the dot com bubble.  These things are inevitable.  If you want to time the market or try to strategically overweight some of these styles, go for it.  But stay true to AA.  Keep the majority of your funds in an asset allocation, and dedicate a small percentage to overweight.

There is always going to be a sweet spot.  Whether its bonds or blue chips or gold or real estate (and the list goes on), there will always be a sweet spot.  And if you own different asset classes- the key is to own all of the asset classes- you will always be participating in that sweet spot.  By owning all of these you will always be positioned to participate.

 The “Oracle of Omaha”, Warren Buffet, CEO and the largest shareholder in Berkshire Hathaway said in his 2010 annual letter:

Fund consultants like to require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is “smart.”

My goal as an investment adviser is to reduce your risk while maintaining competitive returns.  The key to asset allocation is that it reduces risk.  Don’t get caught up in the investment of the day. 

Asset Allocate.  It’s smart.

2010 Interest Rates on 10 Year Bonds

1.      In 2010, bond yields have moved 1.7% from peak (4.0%)  to trough (2.3%)

2.      In 2010 the Fed has changed rates ZERO times.

Interest rates move up and down in small increments all day, every day.  Over time these small movements can have tremendous effects on your investments.  

It is imperative to understand that rate movements are determined by the market, not the Fed.  This is contrary to the way most people think of interest rates.  Rates can start moving up without any decision from the Fed, and that should negatively effect your portfolio. 

We’re coming out of a declining interest rate environment that lasted for 30 years!  This has been a friendly climate for fixed income investments.  What will the next 30 years be? 

How susceptible is your portfolio?  If you would like to review your investments, please don’t hesitate to call.

Remember: The purchase of bonds is subject to availability and market conditions. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

My gift to you:  Your very own crystal ball. 

Every quarter we review portfolios and performance with our clients.  Over the past year and a half, the markets are so volatile on a weekly basis that by the time a quarterly report is being reviewed things have changed significantly and the report is old news.  Reviewing a portfolio is, and will continue to be an important exercise, but the most valuable part of our conversations are always about preparing for tomorrow. 

Most people spend too much time worrying about yesterday instead of preparing for tomorrow.  This often happens in the world of investments.  Too much time is spent looking at past performance. 

People tend to chase performance by selecting investments that outperformed over the last 1,3, and 5 years.  How likely is it that the same investments that beat the markets yesterday are going to perform tomorrow?  Slim to none.

The best thing you can do for your current portfolio is to look at what you own today, and decide if its what you want to own tomorrow.  Think about your future…

Look into your own crystal ball and ask yourself these 2 questions:

1. What investments do you want to own in the next 1,3, and 5 years? 
2. What are you concerned about for the next 1,3, and 5 years? 

Alternative Energy? ♦ Muncipal Bonds? ♦ Gold? ♦ Social Security going bust? ♦ Inflation running rampant? ♦ Deflation? ♦ Oil? ♦ Taxes going up?  ♦ Monthly income? ♦ The dollar?

There are investments that you can position in your portfolio that will make money under any of these circumstances. 

This list will change frequently, and will be different for everyone.  If you’re not talking about the next 1,3, and 5 years you will always be chasing yesterday’s winners, and missing out on tomorrow’s.

I was speaking with a prospective client last week about our investment process, and she asked what Asset Allocation was. 

If you don’t know the answer to that question, your current advisor is doing you a disservice.   For those of you not familiar with Asset Allocation, here is the answer:

Asset Allocation is both an investment philosophy and an investing discipline.  It combines the idea of diversification with a defined strategy.  An asset allocation should be customized and tailored to each individual investor based upon their individual risk tolerance, goals, and timeframe to meet those goals.  There are many questionnaires available to help you determine your investor profile.

The practice of Asset Allocation is based upon numerous research studies, most notably that of William Sharpe and Harry Markowitz.  They won the Nobel Prize for economic sciences, for their contributions to the science of portfolio management.  Their studies suggest that a well diversified Asset Allocation plan may effectively reduce risk while maintaining or possibly even increasing the portfolios rate of return.  More importantly, asset allocation has been shown to be responsible for up to 91.5% of a portfolio’s performance.

For more information, take a look at the Importance of Asset Allocation .

The goal is to invest your money in a variety of asset classes, in amounts determined by your specific, customized investor profile.  An asset allocation plan should be tailored to meet your needs as determined by your risk tolerance, your goals and the timeframe for meeting those goals. 

For example, here are some of the different asset classes:

• Large Cap US Stocks
• Small Cap US Stocks
• International Stocks
• Corporate Bonds
• Government Bonds
• Alternative Investments

Take a look at this Callan Chart and you will see that every year (give or take) a different asset class is the top performing asset class.  By subscribing to this theory, you may be more likely to have at least a portion of your money invested in a top performing asset class, year after year.

This is a simple overview of Asset allocation.   Asset allocation can be combined with other investing strategies such as dollar cost averaging or annual rebalancing.   Asset allocation does not assure a profit or protect against a loss in declining markets.

USE THIS CHART to navigate the roller coaster of investing

Buy Low, Sell high.  That’s the one maxim that every investor knows, but for some reason most people ignore it.   It seems that something always gets in the way: Emotions. 

My most conservative clients are always eager to get more exposure to stocks when the Dow is flying high, and I got more requests to sell in January and February as the market was bottoming than anytime in my career.  Why does this happen? 

Logic and emotions have never been a perfect pairing. We all know it is logical to stay focused on your long term goals during periods of market volatility, but emotionally it becomes very difficult to follow this reasoning. Emotional instincts tend to contradict sound investment decisions.

 If you make investment decisions based on emotion, you may regret that decision in the long run.  This could be selling out your 401(k) after a 40% selloff only to sit on the sidelines watching as the market is up 30% in the next month. **these are hypothetical numbers**

 Making wholesale changes to your 401k plan forces you to time the market.  You need to be correct not only with selling your investments, but again when it’s time to buy back into the market.  The results could be disastrous to your portfolio.

 This chart is a great way to put your emotions in perspective and take a logical approach at decision making.  Next time you want to make an investment decision based on emotion, look at this chart, and ask yourself: WHERE ARE WE NOW?