Thoughts About Asset Allocation - 1
How you allocate your investment assets makes all the difference. Some people say 90% or so of the results of your portfolio depend on asset allocation: How much do you have allocated to stocks, bonds, cash, precious metals, etc.? So we've decided to talk about this in some detail in 2017. Since we can't offer individual investment advice, we'll focus our discussion on the ideas presented in a recent publication, one we've read carefully and think provides important insights in this area. (For individual advice, consult a professional who might advise you personally.) The book: Adaptive Asset Allocation. (If interested, you can read a paper by the authors by clicking HERE.)
While we're still noodling over some of the ideas the authors present - many of which are based on good reasoning and common sense, some of which take some technical knowledge to fully grasp - here's what may be the most important idea; most important because, if you consider it carefully, it really applies to all of us. It has to do with "benchmarks."
"Benchmarks" provide a reference that investors use to gauge how well they're doing. Typically these might be the S&P, or one of the myriad variations of "indexes" now available for use as benchmarks. Indeed, an entire industry has developed that provides literally hundreds of these, from the general (S&P), to indexes of specific countries, industries, etc. While these can serve a purpose for institutional investors looking to evaluate investment managers they've hired to manage a slice of their portfolios, they can also serve as a source of confusion. This is especially true for individuals, whose investment professionals reference how they're doing vs. an "index."
But rather than get immediately sidetracked in an extensive discussion of the pros and cons of index benchmarks, let's recognize the problem and move on to what the authors present as, as they call it "the only benchmark you should care about." Rather than picking any of the existing indexes out there, consider this the following
The Only Benchmark You Should Care About Is...
...one that indicates whether or not you're on track to accomplish your financial goals.
Why We Like This
First of all, you don't have to exhaust the universe of available indexes to find one that fits you to a tee. We've sat in long, boring meetings with professionals ruminating over the exact index or indexes that should be used for Portfolio A or Portfolio B. Our conclusion: There's no clear of "scientific" way that we're aware of to determine the right index. Again, we're not going to get sidetracked justifying our conclusion; but there it is.
Second, you get out of the "performance game." When investment professionals measure how they're doing relative an index, the discussion could be - as it was in 2008-2009 - that your portfolio only lost 35% rather than the 40% that the index lost. Would (or did) that make you feel better to know you beat that losing index?
Instead, focus on whether you're on track to accomplish your financial goals. It's personal and meaningful. If you're off track you can consider what needs to be done to get fix things. Of course, you need to state your goals clearly by writing them down. Don't avoid or skip this step. If you don't write them down, they really don't exist. But assuming you do, you'll be able to look at your investments and decide whether they're helping you accomplish that goal or goals. What else could possibly matter when it comes to your money?
With that introduction, we'll continue exploring the question of how to allocate your assets.
While we're still noodling over some of the ideas the authors present - many of which are based on good reasoning and common sense, some of which take some technical knowledge to fully grasp - here's what may be the most important idea; most important because, if you consider it carefully, it really applies to all of us. It has to do with "benchmarks."
"Benchmarks" provide a reference that investors use to gauge how well they're doing. Typically these might be the S&P, or one of the myriad variations of "indexes" now available for use as benchmarks. Indeed, an entire industry has developed that provides literally hundreds of these, from the general (S&P), to indexes of specific countries, industries, etc. While these can serve a purpose for institutional investors looking to evaluate investment managers they've hired to manage a slice of their portfolios, they can also serve as a source of confusion. This is especially true for individuals, whose investment professionals reference how they're doing vs. an "index."
But rather than get immediately sidetracked in an extensive discussion of the pros and cons of index benchmarks, let's recognize the problem and move on to what the authors present as, as they call it "the only benchmark you should care about." Rather than picking any of the existing indexes out there, consider this the following
The Only Benchmark You Should Care About Is...
...one that indicates whether or not you're on track to accomplish your financial goals.
Why We Like This
First of all, you don't have to exhaust the universe of available indexes to find one that fits you to a tee. We've sat in long, boring meetings with professionals ruminating over the exact index or indexes that should be used for Portfolio A or Portfolio B. Our conclusion: There's no clear of "scientific" way that we're aware of to determine the right index. Again, we're not going to get sidetracked justifying our conclusion; but there it is.
Second, you get out of the "performance game." When investment professionals measure how they're doing relative an index, the discussion could be - as it was in 2008-2009 - that your portfolio only lost 35% rather than the 40% that the index lost. Would (or did) that make you feel better to know you beat that losing index?
Instead, focus on whether you're on track to accomplish your financial goals. It's personal and meaningful. If you're off track you can consider what needs to be done to get fix things. Of course, you need to state your goals clearly by writing them down. Don't avoid or skip this step. If you don't write them down, they really don't exist. But assuming you do, you'll be able to look at your investments and decide whether they're helping you accomplish that goal or goals. What else could possibly matter when it comes to your money?
With that introduction, we'll continue exploring the question of how to allocate your assets.
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