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Asset Allocation Plans Flawed



By Dian Vujovich

For years investors have heard that all they have to do each and every year is rebalance their portfolios to the asset allocation plan they’ve had in place. For the past 30 years my gut never 100 percent believed that. But thinking my gut instinct could be wrong, I would frequently ask those much brighter than myself if that really worked. Of course, every one of them said yes.

Well now, don’t you know, there’s data coming out showing that yes, asset allocation has merits as an investment strategy but it’s not the end-all-and-be-all. And regarding its impact on performance results, can come up short.

Why? Because there are two things the financial wizards who tell us what to do, guide us or sell us product, have no control over—market conditions and timing. Well all know too well what market conditions can do to well thought out investment plan thanks to the stock market’s performance over the last couple of years. And that timing, as in when you’ve entered the market and when you need to exist it, can make minced-meat or caviar out of one’s investment plan and their portfolio’s bottom line.

So market conditions and timing are real biggies and not to be taken lightly.

It’s all too easy to look at a chart of the market’s long-term performance and see with your own eyes that yes indeed the long-term trend has been an upward one. But not acknowledging those big dips along the way that like earthquakes, can happen at any time, is doing you and your financial future an injustice.

Back to the research. Roger G. Ibbotson, he’s the man behind the well-respected Chicago-based financial research company bearing his name that Morningstar now owns, has written a piece for the Financial Analysts Journal titled “The Importance of Asset Allocation”.

It’s a heady piece but here’s the closing paragraph: “The time has come for folklore to be replaced with reality. Asset allocation is very important, but nowhere near 90 percent of the variation in returns is caused by the specific asset allocation mix. Instead, most time-series variation comes from general market movement, and …… active management has about the same impact on performance as a fund’s specific asset allocation policy…”

The research, focused on funds and their asset allocation policy, can also be applied to individual investors and their beliefs about asset allocation.

The good thing about just being an ordinary thinking person, and a skeptic about many financial services and products sold to basically uneducated folks, is knowing what makes sense and what doesn’t. There isn’t a one-dress fits all in the world of money-management. Or one pair of shoes that works for all occasions.

So while we all need the basics—a huge rainy day fund, savings and retirement plans in place— when you enter the market, what your investment choices have been, when you decide to sell your securities and what’s happened in the market during your stay is what creates your bottom line.

Sure there’s an asset allocation plan within that scenario but when it comes to making money, the market’s performance trumps all.


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