Portfolios Care About Asset Allocation, Not Your Emotions.

Investing is a journey with greed, fear and uncertainty creating market fluctuations and volatility to portfolio values. While the cause always changes, one thing remains constant - portfolios don't care about your emotions. 

Sounds harsh? Maybe.

Consider the last time your investments performed based on how you feel? This isn’t the chicken or the egg. Investments don’t react based on how you feel, they react to your actions and choice of asset allocation or lack thereof.

What is Asset Allocation?

Asset allocation is a foundational strategy of dividing an investment portfolio across different domestic and international asset classes—such as stocks, bonds, real estate, hard assets, and cash equivalents—to balance risk/reward and reduce volatility. This allows investors to participate in returns over time by staying invested throughout market, macroeconomic and geopolitical cycles. 

This Time is Different!

Really? Let’s take a trip down memory lane the past 25 years. 

Recall Y2K, Four Horsemen, Dot.com Bubble, 9/11 Recession, Iraq, No Income Verification Mortgages, $150 Oil, Housing Bubble, Financial Crisis, 0.1% Cash, Great Recession, Quantitative Easing (QE), Flash Crash, QE2, Debt Ceiling, Government Shutdown, Greece, Taper Tantrum, QE3 - Shock & Awe, FANG, Brexit, 2016 Election, Tax Cuts, China Trade War, 9 Fed Rate Hikes, COVID Shutdown, 3X Stimulus, 9% Inflation, Ukraine, 10 Fed Rate Hikes, 2022 Non-Recession, Magnificent 7, Trump II. Throughout all these events, asset allocation ensures not all investments in a portfolio are moving in unison. 

Asset allocation is not influenced by emotions; it is a strategically, diversified portfolio spread across different asset classes to help smooth out market fluctuations and reduce overall risk. For example, if stocks are down, then bonds or real estate or gold may be performing well to help offset. 

S&P 500 Index ≠ Asset Allocation.

Many believe investing in the S&P 500 index is the same asset allocation. It's not. 

Being broadly diversified across U.S. large companies represents one asset class. Due to an average annualized return of ~13.9% over the past 15 years, recency bias has investors “setting it and forgetting it”.

Asset Allocation at Work.

Most under age 45 (and some older) don’t recall “The Lost Decade” when the S&P 500 index total return including dividends from 01/01/2000 - 12/31/2009 was -9.1%. Correct, $1 million invested on Y2K was ~$910,000 ten years later. 

Elsewhere from 2000-2009, positive returns and outperformance was captured in index funds of developed international stocks, emerging market stocks, U.S. small cap stocks, U.S. high-yield bonds, U.S. REITs (Real Estate Investment Trusts), commodities, gold, cash and U.S. bonds. 

Speaking of the U.S. Aggregate Bond index, $1 million invested became ~$1,840,000. Because of this divergence, the S&P 500 index didn’t catch up to the U.S. Aggregate Bond index until 2017, or 17 years later. If you’re in the distribution stage of your life (i.e. retirement), that’s not good. 

Asset allocation models vary and ideally are based on timelines for the need of funds in a financial plan, not your age. How one invests a Roth IRA, Traditional IRA or taxable brokerage account could be different and should align with “when” and “how much” the plan projects to draw from each account.   

Ignore at Your Own Risk. 

When investors ignore asset allocation, they risk making decisions based on emotion. During market highs, greed sells lagging asset classes. During downturns, fear sells into panic without a plan back into the long-term strategy. These emotional responses create market timing and remove your foundation.

So remember, during times like these, your portfolio cares about asset allocation — a foundational strategy to help you manage risk, smooth out market volatility, and stay on track to meet timelines of your financial goals. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.

The original article appeared in the April editions of Local Town Pages for Holliston, Natick, Ashland, Franklin, Hopedale, Medway/Mills, Bellingham, and Norfolk/Wrentham. Additionally in 1st weekly edition of Community Advocate for Shrewsbury, Westborough, Northborough, Southborough, Grafton, Marlborough, and Hudson. 

Please call me at (508) 834-7733 or directly schedule a meeting to learn more about considerations for planning and investing so you can balance kids, aging parents, and your financial independence.

PlanDynamic, LLC is a registered investment advisor. This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject or the article. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.

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