AdvisorShares: Turning Asset Allocation Upside Down

ETF Trends

After the second 50% drawdown of the US equity market in one decade, the investment industry began to reassess the idea of what asset allocation should look like. Unlike the 1980’s and 1990’s, financial professionals can no longer rely on an almost static 60/40 or 70/30, watch the equity portion triple in 15 or 20 years  and then flip the whole thing to fixed income for a safe 6%.

As the S&P 500 cascaded lower in 2008 and into early 2009 fear dominated and investors questioned whether any equity exposure was suitable. Many advisors were no doubt answering questions about putting it all in bonds or relatively sophisticated clients may have been asking about absolute return or long/short strategies.

Fast forward to mid-2013 and clients started to think they did not have enough equity exposure and that sentiment still exists today and will likely persist until the next bear market commences.

Of course the important thing is a disciplined approach of choosing a suitable asset allocation and adjusting it appropriately and hopefully infrequently for life events. And while adjusting allocation every few months is not a disciplined approach, it does make sense to consider longer term return expectations, what we’ve learned in the last 15 years of how markets perform and the differences between retirement choices made by baby boomers versus the boomers’ parents.

The Wall Street Journal had an article titled Everything You Know About Retirement Investing Is Wrong which address this point. It raises the very real threat that newly retired investors face which is a large decline in the equity market right after retiring.

Assuming the 4% withdrawal rule, a couple with $1 million in investment accounts having run their numbers and determining that $40,000 from their investment accounts plus other sources of income will get the job done goes ahead and retires.

For the couple who went through this process in December, 1997 everything worked out fine. In a 50/50 portfolio the equity portion grew by 30% in 1998 to $650,000, their fixed income allocation paid them 4.5-5.5% all year, they took their $40,000 and started 1998 with $1,135,000 and feeling comfortable.

View Comments