Finding Your Perfect Asset Allocation
By Martin Kirkorian
When I first meet with a potential new client I will often ask them the following three questions.
What is your investment strategy?
What is your portfolios asset allocation?
Why did you choose this specific allocation?
The overwhelming majority cannot answer these three questions. Most individuals cannot explain what their investment strategy is.
The truth is that most investors do not have an investment strategy. Many investors make their investment decisions based on hunches -- “I think the market is going to ...” -- and the opinions of the pundits and talking heads in the financial media -- “I heard someone on CNBC say that the market is going to ...”
Achieving your financial goals starts with making investment decisions based on things you can control, and asset allocation has more control over your portfolio’s chances of success than any other decision you will make. I know that flies in the face of most everything you hear in the financial media.
However, numerous studies and Nobel Prize-winning research over the last 50 years has demonstrated that more than 90 percent of your retirement portfolio’s performance will be determined by your asset allocation decision.
When it comes to investing, every allocation has risk and return tradeoffs. The question every investor needs to ask themselves is “how much of a trade-off am I willing to take?
The accompanying chart shows how a portfolio comprised of various allocations of stocks and bonds performed during the bull market years of 2017, 2013, and 1997 and the bear market years (shaded in gray) of 2008, 2002 and 1974. The bottom row shows the average return each asset allocation earned from 1926-2018.
For example, a portfolio with an asset allocation of 100 percent stocks gained 20.1 percent, 32.9 percent, and 33.2 percent respectively during the bull market years of 2017, 2013 and 1997.
This portfolio however lost 37 percent, 22.1 percent, and 26.9 percent during the bear market years of 2008, 2002, and 1974.
At the opposite end of the chart, the significantly more conservative portfolio of 25 percent stocks and 75 percent bonds gained 6.2 percent, 5.7 percent, and 15 percent respectively during the bull market years of 2017, 2013, and 1997.
However, during the bear market years of 2008, 2002, and 1974, the 25-75 portfolio gained 1 percent in 2008, 5 percent in 2002, and lost only 2.4 percent in 1974.
When it comes to investing, no investment strategy can consistently provide above average performance all the time, and asset allocation is no different.
However, asset allocation can significantly increase an investor’s chances of having a portfolio they can be comfortable with during bear markets, bull markets, and every market in between.
Martin Krikorian is president of Capital Wealth Management, a registered investment adviser providing “fee-only” investment management services located at 9 Billerica Road, Chelmsford.
He is the author of the investment books, “10 Chapters to Having a Successful Investment Portfolio” and the “7 Steps to Becoming a Successful Investor.”
Martin can be reached at 978-244-9254, Capital Wealth Management’s website, www.capitalwealthmngt.com , or via email at, firstname.lastname@example.org .