Investment > Asset Allocation

The investing environment is volatile, challenging, and opportunistic. Consistently investing through easy and difficult markets is the best method to create and increase wealth over time. The problem, of course, is that, in most cases, investments with greater long-term potential also have greater short-term volatility. To make it even more difficult, short-term volatility to the downside can disrupt financial plans and create psychological distress if cash is needed when markets are down. It is much better to be prepared by aligning an invesment portfolio with an investor's cash needs.

Rather than follow any standard rule of thumb (e.g., 100 - age = equity exposure) or to oversee standard portfolios that do not match with an investor's needs, we developed a process that allocates investments much like the capital structure of a company. At the top of the capital structure is cash (least volatility/risk and least return) and at the bottom is equity (most volatility/risk and most return). In between is a sliding scale of volatility, risk, and return.

The process works as follows:

A. Cash. First, each investor must determine how much cash is needed to ensure coverage of potential short-term needs. Six to 12 months typically suffices.

B. Fixed Income. Next, we recommend 3 to 4 years of cash needs be invested in fixed income investments. Fixed income investments typically provide a greater return than cash, but also provide more stability than equity investments in the event that cash is needed from these funds sooner than expected.

C. Equity Investments. The balance of investment funds are allocated to equities, commodities, currencies, real estate, alternative, and private investments. As is abundantly clear from recent events, even though an equity-like investment is fundamentally sound, it is impossible to have any comfort that it will create any value over a short period of time. It may of course. But do not count on it. The market has an enormous propensity to significantly overvalue and undervalue investments in the short-term.

We typically review and adjust these allocations quarterly, or more often as client circumstances change. As a result, the allocations adjust over time as cash needs change - just like it is supposed to work.