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In this month’s issue, we have a few articles on portfolio allocation. Paul Merriman discusses having exposure to four categories of equities (or asset classes, as he describes them) to realize long-term growth in wealth. Craig Israelsen explains how to construct a portfolio to fend off inflation. I preview the changes we are in the process of making to our asset allocation models.

All three of the strategies in these articles have historically worked well. It is reasonable to expect all three to continue to work well in the future based on the historical data.

There is one big caveat you should be aware of. It’s a huge caveat, and one you should never forget. Allocation strategies don’t work if you can’t consistently adhere to them.

Where most investors fail is simply not getting the basic mix of stocks, bonds and cash right over the long term. They get greedy. They get fearful. They get distracted by the siren calls of the pundits calling out what’s working right now or warning about what could happen.

It’s a recipe for failure. And even the so-called smart money—institutional and other large investors—make these very same mistakes.

I understand the temptation to focus on what seem like predictions. You may have strong opinions about interest rates, politics, the economy and/or valuations. You may be confident in your opinion of where stocks and/or bonds are headed. There may be a pundit you agree with.

Predictions are a lot more comfortable than uncertainty. It’s easier to think about the events we can foresee than place odds on things we can’t. Yet, events we don’t expect do happen. And there will continue to be surprises in the future.

The best investors don’t get swayed by the uncertainty. Instead, they invest through it while keeping an eye out for opportunities that pop up along the way. You and I can do the same.

An asset allocation strategy is the road map you follow amid the uncertainty. It is a framework designed to align risk and return with your goals and tolerances. Adhere to it and you will get better returns than if you constantly invest based on what you think will happen.

The AAII Way project is designed to help you find the right allocation based on your goals and your tolerance for risk. It will also help you to think through how you will implement the allocation into a portfolio. You can see everything we’ve created so far at www.aaii.com/AAIIWay.

In this month’s issue, we’re focusing specifically on allocation with The AAII Way. In this article, you can see a preview of the changes we’re in the process of making to the AAII Asset Allocation Models.

In adjusting the allocation models, we considered an individual’s ability to adhere to an allocation strategy. The equity exposure was reduced in the moderate and conservative allocation models. The moderate investor model is now 60% stocks and 40% bonds instead of 70% stocks and 30% bonds. The conservative allocation model is now 40% stocks and 60% bonds.

The 60/40 allocation is a well-accepted allocation benchmark. We departed a little bit from the traditional version of it by using a far more diversified mix of stocks and including both intermediate- and short-term bonds.

The allocation models are just that, models. Allocation is ultimately a personal decision. We can offer guidelines, expose you to ideas about what has historically worked over the long term (such as the aforementioned articles from Israelsen and Merriman) and give you tools to create your own investment policy statement (The AAII Way). It’s still ultimately up to you to pick an allocation approach you can stick with no matter what the market is doing.

Once you do, consider using the My Portfolio tool to help you track it. Many AAII members are already doing so. You can join them by going to www.aaii.com/myportfolio. And while you are here, be sure to hop over to www.aaii.com/journal. You’ll not only be able to see the current issue, but you will also be able to access our vast archive of past issues. Plus, at the start of each calendar month, you’ll see the new issue without having to wait on the postal service.

Wishing you prosperity and good health,