Rethinking Asset Allocation

IndexUniverse ran a webinar titled Rethinking Asset Allocation. I looked at the PDF but have not had time to listen to the webinar as we are still out of town enjoying Vancouver. Since I did not listen to the audio I'll talk more generally.

Investing requires introspection to assess your current portfolio and your own ability to navigate market cycles in whatever manner is appropriate for you. To that point it is worthwhile to understand your own asset allocation to make sure you can sleep at night and that it gives you a reasonable chance to have enough money for when you need it. Do not minimize the sleep factor. Chances are insomnia, so to speak, will cause meaningful selling of an asset class at exactly the wrong time.

Assuming you don't do something wildly speculative like putting 25% of your portfolio into a lottery ticket biotech that blows up then the biggest risk comes from panicking after a big decline. I write a lot about trying to avoid big declines for two reasons; it is a way to add value over the entire cycle and you are less likely to panic if you can avoid panic situations that typically occur when a portfolio cuts in half.

Additionally "new" asset classes when used in moderation can help smooth out the ride. Things like currencies, commodities, absolute return and anything else you want to add in are not really new but the ease of accessing them via retail funds is new. Obviously plenty of people will misuse the "new" asset classes but that doesn't have to be you.

Asset allocation requires ongoing study but changes to the practice or if you prefer, the science are probably more evolutionary not revolutionary meaning that one bear market does not mean equities are dead or that half of a portfolio should be in absolute return funds. There will be future "normal" bull markets in equities even if they are easier to find in foreign markets, stocks will go up a lot and you will want to have exposure.

I've mentioned a few times (with no claim to originality) that the biggest lesson learned over the last decade or maybe just the 2008 bear market was about volatility tolerances. People learned the hard way they had too much exposed to risk assets.

The first picture is from Deep Cove. The second picture is from Cleveland Dam and in that last one, someone is overcoming a fear at the Capilano Suspension Bridge.