Asset Allocation: Investing by the Numbers
By Steve Selengut
Professional Investment Portfolio Manager since
1979
BA Business, Gettysburg College; MBA Professional Management
Johns Island, SC, U.S.A.
Sanserve[at]aol.com
www.sancoservices.com
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Uno. Asset Allocation is an investment
planning tool, not an investment strategy... few investment professionals
understand the distinction. Investment strategies are used to implement
the asset allocation formula that investment planning produces. Many
investors incorrectly believe that investment planning and financial
planning are one and the same. Financial planning is the broader concept,
one that involves such non-investment considerations as: Wills and Estates,
insurances, budgeting, trusts, etc. Investment Planning takes place
within the Trusts, Endowments, IRAs, and other Brokerage Accounts that
come into existence as a result of, or without, Financial Planning.
Zwei. Asset Allocation is a planning
tool that allows the investor to structure his or her investment portfolios
in a manner most likely to accomplish the goals established for each
portfolio and for the investment program as a whole. It is the process
of planning how the portfolio is to be divided between the two broad
classes of investment securities: Equities and Income. Security sub-classes
have little relevance, and should be avoided. K.I.S.S.
Tres. Equities are the riskier of the
two classes of securities, but not because of the price fluctuations
that are their basic character trait. They are riskier because they
represent ownership in a business enterprise that could fail. The risk
of capital loss can be moderated or minimized in the security selection
process and with a management control activity called diversification.
The primary purpose for buying Equities is to sell them for capital
gains, not to save them as trophies to brag about in chat rooms. But,
they can be screened and selected in a manner that can make them less
risky than other, non-fixed income, investments and speculations.
Shi. Income securities are less risky
than equity securities because they represent debt of the issuing entity,
and owners of debt securities have a "superior" claim on the
assets of the issuer. Stockholders have to rely on their salivating
class-action attorneys to mitigate their losses if the company fails.
With proper selection criteria and diversification, the risk of capital
loss is negligible and price fluctuations can be mostly ignored except
for the trading opportunities that they provide. The primary purpose
of these securities is income generation, either for current consumption
or for use later in life. Capital gains here should be taken... and
bragged about in those chat rooms.
Cinque. An Asset Allocation Formula
is a long-range, semi-permanent, planning decision that has absolutely
nothing to do with market timing or hedging of any kind. It is designed
to produce the combination of Capital Growth and Income that will achieve
the long-range personal (pay those bills) goals of the individual. Thus,
it must not be tinkered with because of expectations about anything,
or rebalanced arbitrarily because of natural changes in the market values
of one asset class or the other. An asset allocation mutual fund is
an oxymoron.
Hat. Asset Allocation is the only proven
cure for inflation. If properly managed using The Working Capital Model,
it will almost certainly increase the level of portfolio income by more
than the rate of inflation, which is a measure of the purchasing power
of your dollars, not the dollar value of your purchased securities.
Any 100%-equity investment portfolio, regardless of size, is less inflation
proof than any same-size, more balanced, portfolio. This is because
the income on equities, and the capital gains that they may produce,
are not contractual, and too often ignored when they do make an appearance..
Sju. In addition to the potential of
failing to keep up with inflation using an Equity Only asset allocation,
regardless of your age, greed management becomes much more of a problem.
In a rising market, evidenced by the presence of more profit taking
opportunities than lower priced bargains, investors tend to take positions
in lower quality issues, current story stocks, newer issues, etc...
just to be in there. A 30% or so Fixed Income allocation can be a major
focus factor, and it will keep the base income line moving upward.
Tam. Many investors, and even a large
number of Investment Professionals, think that income securities have
some claim to price stability in addition to their role in providing
present or future disposable income. They just don't, and their prices
may fluctuate in either direction in anticipation of changes in expectations
about the direction of interest rates.
Isishiyagalolunye. If you focus exclusively
on market value, dwell upon comparisons of your unique portfolio with
the market averages, expect performance of some kind during specific
time intervals, and listen intently when someone speaks about the future,
any asset allocation work you do will be ineffective.
Desyat. Cash is not an investment and,
therefore, is not a class of assets within an asset allocation model.
Most entities that include cash or money market balances in their portfolio
mix are using it as a hedge against market movements in one direction
or the other... in the future. This is a market-timing effort that has
no place in asset allocation planning or thinking. Asset allocation
transcends both short-term market trends and long-term market cycles.
Steve Selengut:
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book
that Wall Street Does Not Want YOU to Read", and "A Millionaire's
Secret Investment Strategy"
Published - March 2008
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