Category Archives: investment philosophy

The Smartest Way to Invest

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.

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Are You Fearful or Greedy?

It was 2 years ago this week (10/16/08) that Warren Buffet wrote his “Buy America, I am.”  Op-ed article in the New York Times.  Buffett encouraged investors to “be fearful when others are greedy, and be greedy when others are fearful.”  In the 2 years since the article was written, the S&P500 has gained +29.1% on a total return basis through the close of trading last Friday (10/8/10).

Buffet is clearly a natural at removing any emotional connection to investing.  In May 2009 I wrote about the risks of investing based on your emotions in Buy Low, Sell High.  Where are we now?, and I still find the chart a valuable resource in analyzing the emotional analysis of where we are in the market any given day.

In my daily conversations, I ask everyone I talk to what they think of the economy and where they think the markets are going.  In summary: There  is not a lot of greed in today’s environment. 

If you ask me, I would point directly between HOPE and RELIEF on the chart.  What do you think?

take the emotions out of investing

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Main Street vs. Wall Street

We work with a lot of small business owners. A popular topic of conversation lately has to do with the fact that the markets have recovered so fast over the last few months yet their business has not improved nearly as much. Business owners just don’t get it, and find it hard to believe in this market. There is a divide between Wall Street and Main Street, and it is growing.

On Wall Street, companies are much larger and have the ability to trim inventories and personnel more efficiently than many of these small businesses. Trimming these excesses squeezes every juicy penny out of every last dollar and it all drops to the bottom line. The market sell off was extreme, outlooks became dire, and earnings expectations from Wall Street were drastically reduced. It has become easy for companies to meet and even beat such a low earnings bar.

Main St is a very different picture. Unemployment is still high and budgets are still tight. People are learning what it is like to live within their means for the first time in a very long time. Most are adjusting- frivolity is out, and bag lunches are in. It is not an ideal world, but there is a sense of comfort and confidence now that talk of an actual depression is a fading memory.

In our opinion, market levels are hardly excessive, and the outlook continues to improve. We are still 25-30% off of the highs of 2007. I think we may be at a comfortable place for the market, with some continuing upside due to excess cash and high levels of money market balances. Profits could and should continue to surprise to upside and credit conditions are still below ‘normal’. Additionally, policy makers are continuing a supportive monetary environment.

This is the concern going forward; when this loose monetary policy starts to tighten and dollars are slowly vacuumed up from the economy…then what? Will the fed get it done before inflation runs where the wild things are or will it put a new stranglehold on the economy. Addition concern lies in the comfort with riskier investments that is sought by investors in a zero interest rate environment.

It is easy to forget how scared everyone was of any kind of risk back in the 1st Quarter of this year. Where do you think we are now?

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What is Asset Allocation?

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:pie chart

  • 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.

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