Asset Allocation Lessons: The 70% Inflation Solution

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

---

Investors: Avoid These 5 Common Tax Mistakes

For many investors, and even some tax professionals, sorting through... Read More

Success Trading: Yet More Basic Terminology for New Traders

In this day and age of online brokers for virtually... Read More

Part II of Day Traders and Swing Traders and Options? Maybe!

Before every protective put trade it is possible to calculate... Read More

Better Investing Made Easy

If there were one piece of advice that an investor... Read More

The Truth About Real Estate Investing - Is It Right For You?

You have probably been hearing, seeing and reading that real... Read More

Guru Focused: Robert Olstein?s Short Sells

While it is rather rare that value gurus sell stocks... Read More

Investing & Online Stock & Share Trading: Money & Risk Management - Atkinson Portfolio Planner (1)

This article was originally featured in Daryl Guppy's 'Tutorials in... Read More

Use this Simple Trick its to Buy $100 Bills Direct from your Bank for only $97

Most People just don't understand the power of using their... Read More

What Age Should I Start Saving For Retirement?

Ask this question to 100 people and you will receive... Read More

Everybody Wants to Know How to Invest

Those unfamiliar with the process of making and managing investments... Read More

Why You Need To Buy and Sell Gold Coins (Part 1)

The Value of Gold in a Era of Paper Assets,... Read More

Oil and Gasoline Price Uncertainties

The Light Crude Continuous Contract hit an all-time high at... Read More

Holy Grail Investments

Every year I go to the Money Show in Orlando,... Read More

Trading Is Not Rocket Science!

Despite what some people may lead you to believe; day... Read More

The Myth of the Earnings Yield

AbstractA very slim minority of firms distribute dividends. This truism... Read More

Before You Start Investing

There maybe several reasons why you to want to invest... Read More

Creating a Financial Future - Putting Your Plan Into Action Part 1

This column has previously discussed "picturing the future that we... Read More

Can Using Sales Leaseback Method of Investment Property Acquisition Reduce Risk?

Sales Leaseback compared to traditional property investmentCan a Sales Leaseback... Read More

Secret Stock Options Trading Strategies the Experts Don`t Want You to Know

To understand stock options, we need to look at Webster’s... Read More

Exchange Traded Funds

They call 'em ETFs.There are hundreds of them.The mutual funds... Read More

Real Estate Clubs Hot Among Investors

Six or seven years ago, the stock market was booming,... Read More

Stock Market Horizons: Gold $3,000, Oil $70

In the last two decades, even though gold prices have... Read More

The Three Legged Stool

My paternal grandparents were born near Lake Como, Italy. My... Read More

Economic Survival in the 21st Century - the Three Key Questions to Ask

In this "special report", I want to pose a few... Read More

Short Term Savings Products

When you invest, it simply means that you are putting... Read More

The Arrow-Debreu Contingent Claims Model of Investment

Throughout the discussion of speculation and stability, we emphasized that... Read More

Wit and Wisdom on Money, Wall Street and Success - Part #1

I love to collect quotes as they concisely promote a... Read More

Keep Stock Market Investment Profits

Have you had one of those huge investment winners ?... Read More

How to Buy to Let

Find out everything you need to know about buy to... Read More

Variable Annuities

You know all the articles you read about annuities that... Read More

Justify Social Security ... Dont Save for Retirement

It is a common question when investors review their retirement... Read More

When It Comes To Investing, Asking The Right Questions Can Help You Make The Right Decisions

Are you ready to open your pathway to financial independence?Well... Read More

Buying a Home - Your BIGGEST Investment

This column has often focused on intangible investments like stocks... Read More