"Asset Allocation" is the embodiment of and guidance offered
by some Nobel Prize-winning portfolio construction/management research:
·
Asset Allocation is how we most prudently aim for either the best gains
at a set level of risk or the least amount of risk for a targeted level of
gains.
o
Aggressive investors are about 95% stocks and 5% bonds/cash
o
Moderately Aggressive = 80/20
o
Moderate = 60/40
o
Moderately Conservative = 40/60
o
Conservative = 20/80
o
Most working folks our age and time-horizon are Moderate to Aggressive;
most retirees are Conservative.
·
Asset Allocation spreads out our investments across the strategic asset
classes and sub-classes thereof:
o
Stocks (large, medium, or small companies... growing companies or
well-established money-makers... USA,
developed-market foreign, developing markets...)
o
Bonds (corporate, government, domestic or foreign,
high-quality/low-interest or low-quality/high-interest, and so forth)
o
Commodities
o
Cash
o
How much into each determines portfolio.
Generally, high volatility is riskier and low volatility is safer, and
more risk is correlated with better returns while less risk usually means lower
returns. A typical retiree needs to be
safer, and professional with 20+ years to retirement can probably afford to
take more risk.
·
How to implement Asset Allocation
o
For my clients, I use mutual fund portfolios of my own design, allocated
according to the strategic asset allocation guidance of trusted sources
(usually it's Ibbotson's work that's now owned by Morningstar). Specifically, I offer clients my Strategic,
Schwab Index, and Flex portfolio models.
Each has a different take on how to implement Asset Allocation. Strategic III models are my preferred
portfolios now.
§ Over time,
we'll shift from Aggressive on down to Conservative--the closer you get to
retirement, the more conservative.
Usually about every 5-10 years we'll downshift by re-allocating the
portfolio.
§ I use
best-of-breed mutual funds to populate each part of the Asset Allocation of
each model.
o
"Target Date" funds do it all for you ongoing. You could put everything into a target date
fund and leave it there forever, and employer-sponsored retirement plans often
offer such and even put you into them automatically.
§ You're in a
"The 2045 fund can be used forever by anyone expecting to retire around
Year 2045.
§ But they
usually use only their own in-house products.
Your Nationwide Destination 2045 fund at work uses only Nationwide
products. The results have been very
good lately, but not as good over the long-term.
o
"Allocation Funds" are like Target Date funds in they are
total portfolios in one fund, but they don't change over time--an Aggressive
allocation fund remain so, so you'd exit that one and move into a Moderate or
Conservative fund as you get closer to the retirement year.
Garo Linck Partoyan
Potomac Wealth Strategies, LLC
