Asset Allocations - What I’ve Learned So Far

I began my Asset Allocation exercise several months ago.  I wanted to learn to manage my money more effectively.  I looked into the asset classes that most people have available to them in their own retirement plans.  Retirement plans are where the bulk of investment takes place - it’s all I have right now.

I have to admit that I have not been 100% satisfied with this mutual fund methodology.  I believe there are more ETF’s that are specialized enough to give us more asset allocation choices.  However, many of these ETF’s are fairly young and untested for the long run.  Managed Mutual Funds have a track record.  Who can say that there won’t be an ETF that blows up someday completely ruining your portfolio.  I’ll have to spend more time on this later.

I looked for mutual funds that were part of the following classes:

• Stocks
• Bonds
• Real Estate
• Commodities
• Precious Metals
• Money Market (i.e. cash)

Within the stock and bond categories I found sub-asset classes that are included in my allocations.   These include:

• Government Bonds
• Municipal Bonds
• Tax Free Bonds
• Growth Stocks
• Value Stocks
• International Stocks
• Emerging Market Stocks
• Small and Microcap Stocks

I whittled down a list of 30+ mutual funds down to a manageable list of 14 funds.  I played with balanced portfolios, a bond heavy portfolio and a risky portfolio.  Each of the specifics is available in the individual posts.  Here is a table summarizing the performance:

(Wordpress note … I try to cut and paste from excel and it just doesn’t work so well, so I used my trusty snagit to get the formatting that I wanted to come through … still not perfect, but it’s better this time)

I’ve highlighted the best performing fund in a given year.  So … what is this showing you?

Balanced portfolios perform OK, but if you want the best performance, you have to lean towards risk in bull markets and safety in more bearish conditions.  The trick, of course, is knowing the difference between the two.

Even with a constant risky mix, the overall performance is stellar.

Now then, one might conclude by looking at this performance that all this talk about a “lost decade” for stocks is pure hogwash (technical term).  I am not ready to say that.  People love cool headlines like that - Lost Decade … sounds cool right?

Please avoid headlines like that … not because they’re not true … but because they’re incomplete pictures.  The S&P 500 did kind of have a lost decade.  But nobody strictly invests in the S&P 500 … or the Dow … or the Nasdaq.  Anybody who takes their retirement seriously - or any investments, not just retirement - anybody will have some sort of asset allocation.  This allocation will help you avoid the risk of a single asset class - like stocks - which might have a Lost Decade from time to time.

Smarter investors will rebalance their portfolios from time to time.  Which is something to keep in mind in this exercise.  I have rebanced the portfolios at the start of each calendar year.  I want to make you smarter by proving to you how this works out in the long run.  OK, I really want to make myself smarter, but in doing so I hope you get smarter too.  There will have to be an additional step in this analysis because I have not just “set it and forget it” and not rebalanced … I’ll have to tinker with my spreadsheets at another time.

Another thing to keep in mind in this exercise is the start date … 2001 … by that time much of the “tech bubble” had already burst.  I did not choose this date to bring about better numbers.  I chose this date because that gave me more mutual funds to choose from.  I have not even included some funds I selected because they were not around for the start date.

I do believe that by spreading your investments across different asset classes you can avoid any Lost Decades … ok I’ve successfully beaten that term to death.  Any asset class can have its down periods.  If all your money is in stock funds, just change it … just do it … any allocation mix is better than no allocation mix.  You can learn and refine it later.  Long term it will work out.

So here are my lessons learned so far in my Asset Allocation Project:

• Any allocation is better than too much exposure to stocks only
• Rebalancing helps - although I don’t know exactly how much just yet
• Weigh your allocation mix toward risky investments in bull markets and toward safe investments in bear markets
• That last step is more easily said than done
• A balanced portfolio that lets you sleep at night will leave money on the table … but you will sleep at night

So that’s where I am right now.  I’ll keep tinkering and keep posting.