Asset Allocation Myths You Need To Avoid

Asset Allocation Myths You Need To Avoid

Asset Allocation Myths You Need To Avoid

Copyright (c) 2010 Brian FrickeToday, I want to take a closer look at mistakes that could cost you big money when it comes to your financial security and a worry free retirement. This might be a little controversial, and that's okay. My purpose here is to get you thinking, and maybe further review and evaluate your own situation.1. Spreading your money around means a smoother ride.This seems to be a very popular philosophy or strategy held by just about everybody in the financial world. But I believe that approach has serious flaws. Just look back to the bear market of 2000-2003 and what happened there. I remember telling clients don't worry, rarely does the market decline three years in a row. Well, guess what happened in the third year of that bear market? The market went down again and the losses were equal to the prior two years combined!So that was evidence enough for me to figure out that this theory of asset allocation, strategic allocation, pie chart investing, always have a certain percentage in US and foreign stocks and bonds and so forth is flawed. And we saw further proof that the concept is flawed in 2008 when there were hardly any safe havens.2. Base your investing strategy on the results of a risk tolerance questionnaire.Some people believe that you should take some kind of a questionnaire to figure out how much risk you're able to live with and then design an investment strategy that basically guarantees you experience that level of risk. I don't think that makes any sense whatsoever.How does that align with your own personal goals and how you want to live life? What if you only need to take half as much risk to have good odds of keeping and reaching your goals that your risk profile indicated you're willing to live with? Why on earth would you want to subject yourself to more risk than was necessary? Besides that, I'm a firm believer that if you take same questionnaire and fill it out in the middle of a bull market, the results would be significantly different than if you filled the questionnaire out in the middle of a bear market.3. Investing in multiple mutual funds will give you plenty of diversification.I meet a lot of people who think they're diversified because they have money in 10, 15, 20, even 30 different mutual funds. But when we drill down into the mutual fund holdings, more often than not we find that they're concentrated in one area of the market -- usually large-company US - with little or no exposure in international or a small-company.This is fine if the demand for stocks is focused on large-company US, but why on earth would you want to have most of your account allocated to large-company US if the demand, and therefore increasing prices and higher profit opportunities were in areas like, say, international or technology?So the bottom line that I really want to share is I believe that the commonly accepted strategic asset allocation -- always have a fixed percentage of your money in certain investment categories; rebalance periodically; and just stay invested at all times -- is flawed. I believe a better strategy is based on supply and demand -- pushing money into areas that are in highest demand while avoiding areas that are in weakest demand. A more dynamic strategy like this will help you stay on top of a changing market and see the type of returns you deserve.

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