Monday, November 16, 2009

Challenging Conventional Asset Allocation

We are creatures of habit. We tend to do things that are familiar. We eat at the same restaurants. Shop @ the same stores. Drink the same brand of coffee. Have similar daily routines. And, watch the same TV shows.

Investing tends to be the same. We'll invest more domestically than in foreign markets. Is this a smart economic decision or once again a 'familiarity' issue? You can argue your case either way.

However, you can make a pretty good argument for not following the heard. For instance, if you lived in China, Norway, India or Brazil would the local Certified Financial Planner (CFP) recommend you invest 60%-70% of your money in US stocks? I doubt it. The simple answer may simply be invest where the best opportunities lie within your risk tolerance.

Most asset allocation models will have an emphasis on large US based companies. They'll state the benefits of diversification, quality of earnings (GAAP Standards), transparency and multi-national appeal.

MFS Investment Services has a nifty online calculator for determining your asset allocation(see the left margin for calculators and planners). Even if you test conservative, they recommend a 35% exposure to US stocks. If you are aggressive, you can have an 80% exposure. No model has foreign exposure greater than 20%.

I think it's time to challenge conventional wisdom. This may sound contrarian. But, think about it. When is the last time you saw a 401k plan offering a REIT option? How about a commodity fund? Or, maybe even a gold fund? It simply doesn't happen. Yes, things have evolved whereby some plans offer REIT's these days. But, most plans continue to offer the same asset allocations they did 10 years ago.

Times are changing and portfolio management is evolving. Thinking outside the conventional box could lead to greater returns over the long haul with less risk.

No comments: