Investor Spring Cleaning 2008

With Asset Allocation, It's All About You

Jeff Cox, |Special to

It's called your personal investment portfolio for a reason.

When it comes to deciding where to put your money, the overriding -- nay, the only -- factor is where your investment goals lie. A 21-year-old college graduate in his first job will have different investment goals than a 73-year-old widow living on a pension.

And though there are some common denominators, age and occupation aren't necessarily the deciding factors.

"I don't think it's one size fits all," says Julie Caserly, president of JMC Wealth Management in Chicago. "That's a big mistake that people make. Any big investment firm, they all have asset allocation models to see what your personal strategy is. It's not based on your age."

One of the oldest market investing chestnuts is that your exposure to equities in their various forms -- individual stocks, mutual funds, exchange-traded funds -- should correlate directly to your age.

Investor Spring Cleaning

But what if you're in your late 50s but not planning to retire anytime soon? What if you're in your late 20s but not planning to have children? And what if you're the kind of investor who wakes up at 3 am in a cold sweat, panicked over whether the index fund you just bought might badly underperform the market?

These are all investment factors, fueled by personal wants and needs, that have to be addressed when discussing asset allocation.

Caserly knows money managers who get frantic calls from those anxious investors, and she knows why.

"If you're really aligning your client's personal strategies to their asset allocations, building it from the inside out, you don't get those frantic market phone calls," she says. "I know a lot of advisers do, but that tells me the client's money is not aligned with their personal strategy."

That said, determining how to make the two match up generates approaches that are far from universal, especially when the market is in turmoil.

Stocks vs. Bonds vs. Loaning Money to Mom

"Risk appetite" is a common phrase among investment counselors, and the connotation generally speaks to the percentage of stocks against bonds and other cash positions in a portfolio.

The higher the risk appetite, the thinking goes, the more stocks in your portfolio.

And risk-taking carries its own, well, risk.

"Asset allocation is a forward-looking decision, therefore you have to be taking a position on the market," says Peter J. Tanous, president and director of Lynx Investment Advisory in Washington, DC. If your outlook is very long-term it's easy because the market always goes up over time.

"The problem is that it goes down a lot," says Tanous. "If you are a nervous investor then you should, even if you're long-term oriented, have a more conservative portfolio. The problem today is that a nervous investor who goes very conservative today will miss the rebound when it comes, and that's one of the dangers of changing your asset allocation according to how you feel or how the market happens to be acting at any given time."

Indeed, a volatile market, which might describe the current one, renders conventional thinking somewhat useless and leaves money managers conflicted over the best ways to keep portfolios balanced while still maintaining growth.

Investment strategists nowadays see little use for exposure to individual stocks. Rather, they're far more often counseling mutual funds, which offer a basket of stocks in one place managed by a professional familiar with those companies; exchange-traded funds, which can give investors exposure to commodities without all the risk; and cash positions that extend beyond bonds.

In fact, there are those who are eschewing bonds altogether, and instead advising clients to take their cash and loan it out privately. The returns are certainly better than the anemic yields Treasurys offer nowadays, and the move can be mutually beneficial.

"In the lending area for individuals who have never thought out this area, it might be as simple as lending money to someone you know against their house," says Dennis Daugs, managing director of Lakeside Capital Management. "I have a loan at 6 percent for $40,000 to my mother against her condo. It's a good deal for me at 6 percent. It's a great deal for her at 6 percent.

Creating Thinking

In a broader sense, Daugs says the state of the current market requires creative thinking. He is also encouraging his clients to invest in reliable commercial real estate -- apartment buildings, primarily -- and often in pools with other investors.

Yet there also remains a taste for the conventional -- a combination of mutual funds and cash plays that maintain balance but provide flexibility, all with an eye toward meeting expectations over the long term rather than beating the market in the short term.

"For most individual investors, proper diversification can be accomplished through a combination of purchasing ETFs and very high-quality mutual funds," says Dennis Barba, managing partner of the Oxford Group. "But again, not by chasing hot sectors and managers, but by doing so via a very clearly designed and executed strategy."

In its most current form, asset allocation is in the midst of another change of thinking.

Money managers are again ready to send their clients into more stock-weighted portfolios, though many say they are doing so with caution flags waving.

"We remain neutral equities for our conservative and moderate investors, slightly overweight equities for more aggressive investors," says Matthew Rubin, director of investment strategy at Neuberger Berman. "We find equity valuations to be quite inexpensive in the current market. Within equities we favor large-cap to smaller and mid-size companies. We also recommend an allocation to international equities."

Yet JMC's Caserly, who also is beginning to like the stock market again, generally counsels keeping up to 30 percent of a portfolio outside the stock market. In particular she likes real estate investment trusts that are not traded publicly.

Again, though, it's all about goals, and the main rule is that sometimes the rules need to be bent, if not broken altogether.

"Most multimillionaires I meet never have more than 40 to 50 percent of assets in the stock market," Caserly says. "They don't need to take the risk, so why take it?"