For investors only... and for speculators who need to invest their winnings.
Lesson One: Asset Allocation is an Investment Planning Tool, not an Investment Strategy... few investment professionals understand the distinction, because most think that Investment Planning and Financial Planning are the same thing. Financial Planning is a broader concept, and one that involves such non-investment considerations as Wills and Estates, Insurance, 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.
Lesson Two: Asset Allocation is a planning tool that allows the Investment Manager (you, if you have not hired one) to structure the investment portfolio in a manner most likely to accomplish the goals of each specific investment portfolio AND of the investment program as a whole. Asset Allocation is the process of planning how an investment portfolio is to be divided between the two basic classes (and only these two classes) of investment securities: Equities and Fixed Income. Security sub-classes have little relevance.
Lesson Three: 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. They are less risky than other, non-fixed income endeavors.
Fixed income securities are less risky because they represent debt of the issuing entity, and owners have a claim on the assets of the issuer that is superior to that of Equity holders and their salivating class action attorneys. With proper selection criteria and diversification, the risk of capital loss is negligible and price fluctuations can be 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 chat rooms!
Lesson Four: 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. Thus, an asset allocation fund is an oxymoron.
Lesson Five: 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. Six figure portfolios allocated 100% to Equities are not nearly as inflation proof as those that are more balanced? see Lesson Six.
Lesson Six: 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 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. How's that for throwing cold water on an ancient Wall Street maxim.
Lesson Seven: These are just some of the lessons to be learned about asset allocation.
Steve Selengut
sanserve@aol.com
steve@sancoservices.com
800-245-0494
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
Once upon a time, offshore investment strategies were spoken of... Read More
Sales Leaseback compared to traditional property investmentCan a Sales Leaseback... Read More
Have you considered buying a franchise instead of trying to... Read More
Mutual Funds are considered to be one of the best... Read More
We've helped a number of clients develop business plans and... Read More
An option is a derivative trading product that is best... Read More
For those who have never given their financial future a... Read More
One among many ways you lose money in non-indexed mutual... Read More
Investing and Trading are not the same thing. The returns... Read More
I had the pleasure of being invited on a friend's... Read More
There is a lot to know about investing. It all... Read More
When you start your program to purchase your "ideal" company,... Read More
There is an area in Brazil that has lower crime... Read More
AbstractA very slim minority of firms distribute dividends. This truism... Read More
When it comes time to retire how many people would... Read More
In April, the U.S. Mint revealed plans to strike in... Read More
Going public in this manner is ideal for companies that... Read More
With the stock market in steep decline, people are looking... Read More
Pre-1933 Gold Outperforms Today's Gold Bullion...Since 1970, an investment strategy... Read More
I've been in and interested in the stock market so... Read More
Motivational guru Tony Robbins teaches that the reason for doing... Read More
Investors usually don't have an aversion to buying an asset.... Read More
Disgruntled investors are going after Wall Street once again, this... Read More
What is the value of a good habit? Think of... Read More
If you know next to nothing, how do you go... Read More
There are many different ways to invest in world markets:... Read More
Okay, so I can tell you I have sat in... Read More
Are you as good an investor as you think? Do... Read More
So you have learned how to trade the markets by... Read More
Firing an employee seems to be easier and easier for... Read More
"All human power is a compound of time and patience!"... Read More
One of the leading traders on Chicago Mercantile Exchange, because... Read More
Putting Rare Coin Market Cycles to Work for You...Until recently... Read More
College Savings Plans ? are they the best choice for... Read More
In the simplest of terms, Arbitrage means to exploit price... Read More
The Roth is kind of weird until you get used... Read More
Most People just don't understand the power of using their... Read More
It always amazes me how much stock market investors resemble... Read More
The syntax is tortured, the grammar mutilated, but the message... Read More
Who is the SEC and why should I ask them... Read More
Leaders are stocks that breakout immediately when the market confirms... Read More
Okay, so I can tell you I have sat in... Read More
Online trading is so seductive - just sit, click, and... Read More
When trying to analyze whether a promotional ad for an... Read More
"All human power is a compound of time and patience!"... Read More
You've probably heard about people who keep their money offshore.... Read More
Have you considered buying a franchise instead of trying to... Read More
Jim Miller is a registered investment advisor. This means that... Read More
Over the long term stocks have provided us with great... Read More
1. Begin investing immediatelyProcrastination is the number one enemy of... Read More
There is a lot to know about investing. It all... Read More
A barrel of oil bounced to over $60 Thu, which... Read More
The inventory of the typical store represents the largest single... Read More
The U.S. economic data reported this week showed strong output... Read More
Despite what some people may lead you to believe; day... Read More
Have you often wished you could have got in on... Read More
There are a number of key reasons why individuals and... Read More
One among many ways you lose money in non-indexed mutual... Read More
First and foremost, an opportunistic strategy for creating wealth in... Read More
In the past most people never retired. They died. The... Read More
One of the fundamental principles of finance is the concept... Read More
One of the greatest preconstruction investing issues that I hear... Read More
FOREX, the term for the FOReign EXchange market, is an... Read More
Step 1: Spend less than you earnPerhaps the simplest financial... Read More
There is an area in Brazil that has lower crime... Read More
Can you concisely summarize your investment philosophy in a few... Read More
Investing |