Guidelines for Selecting an Allocation Strategy

John Lambert from NJ posted over 4 years ago:

This stratification from Aggressive to Conservative would have worked well starting in the late 1980's until recently. But with inflation much higher than interest rates, it is hard to understand how anyone would call losing purchasing power on 60% of their portfolio a "conservative" strategy.

Gene Howe from AL posted over 4 years ago:

Your allocation strategy does not mention the asset class currently in vogue with Gen-Zer's and millennials, crypto currencies like Bitcoin, and non- fungible tokens (NFT's). What percent of an aggressive, diversified portfolio should that asset class represent? Gold and precious metals are also absent from your asset classes. Do you believe an investor's only investment options are stocks, bonds, or cash?

Bob Scott from Missouri posted over 4 years ago:

As an investor for over sixty years have seen many fads come and go. Have been through the inflation of the 1970's and the long periods in market of low or no real returns. It takes nerves of steel at times to hold to your investment program and the bull market we have seen since the financial crisis unfortunately will lead many into not realizing that serious declines happen from time to time and you have to ride those out. As result no matter your strategy down markets hurt but have to be planned for. For those who have new money to add continuing to invest as market declines averages down as well as taking tax losses in taxable accounts can help. For retirees a down market might give chance to move to a Roth IRA vs traditional IRA and reduce the RMD requirements. . Also selling stocks that hold up for those that have been beaten down in bear markets but have recovery potential can pay be dividends for the next bull market. But above all most investors need to be sure they have plenty of cash reserve (even if inflation eating away at it) so they are not forced to sell into a bear market. No matter whether your strategy is aggressive or conservative this is a good time to review your strategy. Fortunately staying with my investment plan has paid big dividends (and capital gains) for me over the years. The biggest mistake I see investors make is panic selling into a down market or thinking they know where markets are going. That is why planning a sound strategy is important and diversification will help in both up and down markets. So reviewing your balance of asset classes at least twice a year is also important.

Barry J from TX posted over 4 years ago:

As John and Bob have stated, this model is much too simple for an increasingly complex investing environment. I remember when I first encountered this allocation model when I decided I would seek professional advice with my growing accumulation of wealth. The company I reached out to ask me to pick one of these TRADEOFF "strategies. I felt like I was a contestant on Monty Hall who could not trade for Door #2. I could not make sense of how this decision fit with my SUCCESSFUL lifelong "strategy" of TAKING RISKS AND GROWING wealth. When I encountered this logic with EVERY advisor I contacted, I realized that this model was an "industry standard practice" whose main purpose was to insulate brokers/advisors from legal liability when the "strategy" I "selected" does not produce the level of results expected. I guess this model it is a gross simplification derived from infamous "Beta" the 3rd factor in the CAPM formula. If so, then the use of a linear "integer" scale instead of a curve based on the distribution of the standard deviation of "Beta" means it is useless when configured as a Monty Hall 3-door problem Yep, the current version of Mr. Market has evolved and mutated similarly to CoViD-19 and now is one bad hombre. The mission you accept by being an independent investor is best summed up by the inscription on the Texas Ranger statue in the lobby at Love Filed Dallas terminal -- "One riot. One Ranger."

Rob from NC posted over 4 years ago:

As I see it, volatility only matters to short-term investors – or short-term thinkers. If a 25-year-old puts 100% of his Roth assets in a single low-expense-ratio ETF (say SCHG, or VGT) and leaves it there for 40 years, why is volatility an issue? The only things that should matter are entry and exit point. If you are “investing” money that you expect to need within a year, then by all means you should consider volatility. But the longer your horizon, the less volatility becomes an issue. I don’t care what your “risk tolerance” is, it is ALWAYS risky to apply short-term thinking to long-term investing. There is absolutely no reason for a young person to put money into fixed income just to “smooth” out the ride. They would be trading long-term gain for what, emotional satisfaction? Emotion has no part in investing. If you let emotions dictate your investment strategy, you are going to pay for it. There is no getting around that rule.

Rob from NC posted over 4 years ago:

I have to add to my earlier post that although volatility might be an issue in the short term, I learned a hard lesson about pulling money out of equities. Back in January 2012, I sold stock to fund a year's worth of expenses, thinking that was the "smart" thing to do. Volatility, or at least downside volatility, was the very thing I was concerned about then. The stock I sold went up more than 150% that year. If I had sold it off piecemeal during the year, I would have gained enough to fund the following year's expenses and then some. Since then, I only keep a couple of months' worth of expenses in cash. The rest stays 100% in equities (and equity ETFs). My new rationale is that I am always more likely to see an increase in asset values than a decrease during any given year. If my assets are decreasing as I sell them to fund expenses, then at least my capital gains tax bill will be lower.