Thursday, February 18, 2016

Asset Allocation Takes a One-Two Punch

When professional stock-picking lost credibility, wealth managers turned to asset allocation – the process of dividing client assets between equities and fixed income in proportions appropriate to age and circumstances. (Getting older? Lighten up on stocks.) Target-date funds give investors glide-path investment programs that jettison stocks as they age.

Could it all be a waste of time and money?

David A. Levine, a former chief economist at Sanford C. Bernstein & Company, believes asset allocation is wrong-headed.  In a pair of New York Times columns he delivers the old one two.

Target-date funds are misguided. Investors should not move out of equities so drastically as they retire. They shouldn't move out at all. Even in retirement, their investment horizons are like the ever-receding horizon confronting a mariner at sea. If you are 99 and investing what soon may be your family's inheritance, you still should be thinking long term.

The ideal asset allocation for the long-term investor is 100 percent equities. "Both the historical record and logic argue very strongly for stocks over bonds. Yes, stocks are more volatile, but if you recognize that the “investment horizon” is always long and always receding into the future, your best bet is to put virtually all of your liquid assets into the stock market."

Levine makes a point courageous investors might ponder, This doesn't mean advisers should worry about asset allocation going out of style. Marketing of the concept has been so successful that many investors believe asset allocation is designed to increase returns rather than reduce volatility.

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