ITA Wealth Management

Investors who continually focus only on return are missing a significant portion of the investing equation. Don’t neglect risk, and one easy way to reduce risk is to construct a well diversified portfolio. Active investors tend to select stocks where they are comfortable or their software tools guide them. Rare is the investor who can select stocks that will enhance their portfolio in a wide variety of asset classes. Instead, they overweight their portfolio frequently in large-cap growth stocks. And we all know, that was not the asset class of choice from 2000 through 2006. Nearly every week I post the “Creme List” over on the Premium side of ITA Wealth Management. These stocks tend to fall into the mid-cap growth, large-cap core, or large-cap growth asset classes. One is not well served by investing only in this style of stock. Let me quote again from Swensen.

“Over weighting assets that produced strong past performance and underweighting assets that produced weak past performance provides a poor recipe for pleasing prospective results. Strong evidence exists that markets exhibit mean-reverting behavior, a tendency for good performance to follow bad and bad performance to follow good. In markets characterized by mean reversion, investors who fail to rebalance portfolios to long-term targets end up with out-sized exposure to recently appreciated assets that prove most vulnerable to poor future results. Only by regularly rebalancing portfolios to long-term targets do investors realize the results that correspond to the policy asset-allocation decision.”

There is a lot of “beef” in that paragraph. 1) Set up a portfolio policy. Too few investors take the time to think through this process 2) Populate that portfolio with index vehicles. We recommend ETFs unless one is investing small amounts each month. If one is investing small amounts, then use index funds. 3) Rebalance the asset classes when they are out of target. We recommend upper and lower limits of 35%. If 10% is the target for a particular asset class, then keep the investments within 6.5% to 13.5% of the total portfolio.

Lowell Herr

Photograph:  Chinese entertainer

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