Model Allocations

May 2017

"The person who follows the crowd will usually go no further than the crowd." - Albert Einstein

I’ve always thought that the road to ruin may be paved by those who drive the same tollway as everyone else in life. In other words, sometimes we get so caught up in doing what others are doing that we don’t even realize where we’re headed. Thus, in the twenty-one years of being in this business, I’ve consistently tried to remind people that “keeping up with the Joneses” can be a foolhardy strategy, and just because you can do something doesn’t necessarily mean you should.

As strange an introduction to asset allocation as this might seem, we believe you shouldn’t be doing what everyone else does when it comes to your portfolio. We believe every individual or couple is unique, and though their finances might resemble their friends or neighbors, that individual or couple’s uniqueness means their portfolio should be different too.

As a refresher, let’s start with the basics. First, remember how important asset allocation is to your portfolio’s direction. The theory behind asset allocation strategy was developed in 1952 by Dr. Harry Markowitz, who discovered that by combining different asset classes an investor could actually reduce the volatility of a portfolio while providing for the potential of an increase in return.

In furtherance of Markowitz’s theory, Gary P. Brinson, Randolph L. Hood, and Gilbert L. Beebower studied the effects of asset allocation, where a diverse mix of non-correlated assets were combined in a portfolio, and verified its tremendous value. In fact, their research showed that asset allocation is responsible for over 90% of the variability in a portfolio’s returns.

Brinson, Beebower and Singer, Determinants of Portfolio Performance II: An Update, The Financial Analysts Journal, 47, 3 (1991).

Accordingly, since asset allocation is the overwhelming determinant of your portfolio’s direction, other factors such as market timing and security selection should be relegated to a much less influential status. Thus, at TWC, we spend the majority of our effort, when it comes to portfolio management, on asset allocation; as for the other factors, we simply seek to control the controllable variables, such as cost, etc. In our opinion, this approach applies the research without getting lost in the less influential variables - which is why we like to say that “asset management isn’t easy, but it should be simple.”

Unfortunately, we believe Wall Street may have taken the above-cited research and turned it into another product called asset allocation models. Many firms believe that you can simply create five or six asset allocation models and apply them to everyone; basically, one size (or five or six models) fits all. But we believe this does not take into account the fact that everyone, no matter how similar their circumstance, is different – and thus their asset allocation and portfolio should be different! And sure, life would be easier for us if we could simply plop every client into five or six pre-formatted portfolios, but I’m fairly certain that taking the easy road rather than the one less traveled is not what Robert Frost much less Albert Einstein would do.

On another note, we hope you are having a great Spring, and enjoy your Memorial Day holiday with friends and family. But please remember what Memorial Day is all about. Previously known as Decoration Day, Memorial Day commemorates the men and women of the United States who died while in service. Never lose sight, especially during these contentious and partisan times, of the heroic men and women of the U.S. armed services who fight for and defend our freedom. These selfless patriots, who hold God and country above all else, allow us the freedom to live our lives as we so desire; please don’t take that for granted, nor let their sacrifices exist in vain. Honor them, and remember the commonality we all have regardless of our different opinions – love of the United States of America.

As always, thank you so much for your friendship and trust. And thank you for your kind referrals – it’s the nicest compliment you can give us!

R. Timothy Curran, JD, CFP®

tcurran@lpl.com Direct 704.499-9703

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
No strategy discussed ensures a profit or protects against a loss.


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