A recent conversation with another Financial Advisor led me to revisit a post I wrote just over a year ago about Diversification. This particular Advisor was having second thoughts about the investing philosophy he had been sharing with his clients for years.
Namely: long term stocks go up, buy and hold is the best strategy and it’s futile to try and time the market. He was particularly frustrated with the fact that many asset classes seem to be highly correlated nowadays. It seems that the market is always in a “risk on” or “risk off” mode where everything either rises together or falls together.
He asked what my strategy was and I shared that it was a little different from his, I did acknowledge the difficulty in the investing environment but told him my strategy had been more income oriented with fixed income, utilities and preferred stock funds as I did not see a trend in the market.
Does Asset Allocation Work?
This brings me to the point of my post this month, namely does the tried and true theory of Asset Allocation still work? Most all of us Financial Planners were schooled in the Harry Markowitz Modern Portfolio Theory, and that is that a portfolio properly allocated among the various asset classes will give the investor the best opportunity to achieve the long term return goals with the least amount of risk.
The problem over the past couple of years it seems is that most all of the equity asset classes (small, mid and large cap stocks) seem to move together. This may be a factor of more automated trading by computers or possibly the fact that we are now in a global investing environment where news travels fast and investors have access to markets worldwide.
No one really knows the answer but the fact that many of the asset classes seem to move in lockstep is a big conversation topic in the Financial Advisor community. With so many beginning to question Asset Allocation’s viability probably means that it will once again prove true at some point down the road, once news headlines and computers no longer dominate the markets.
As to the old standards: “buy and hold” and “don’t try to time the market”, I think many advisors and investors are beginning to question those philosophies as well. Unfortunately for most they will try to implement a tactical type strategy to generate some return only to find out they were late to the party or don’t have the skill set necessary to do it.
So does my Tactical Allocation style work better than this other Advisor’s buy and hold strategy of Asset Allocation? Not necessarily, I think that each advisor has their own investing style and with the right type of client each can work fine.
I am always open to discussions about different investing strategies, I feel this broadens everyone’s horizon and the best style is probably found somewhere in the middle. As to the question, “does Asset Allocation still work?” my thinking is that yes it does with some flexibility. I still like to allocate across different asset classes with the view that it works as long as you are proactive enough to modify the strategy if things aren’t working according to plan.
The most important takeaway for an investor is to understand your Advisors philosophy on investing and make sure it aligns with yours. No one strategy is going to be right 100% of the time so it is best that you and your advisor are always on the same page and understand that the ultimate objective is to help you reach your financial goals.