Smart Investing with Asset Allocation

Smart Investment Strategies

Identifying the ProblemHow We Can HelpAsset AllocationResources

Identifying the Problem

  • Even though the stock market is a reasonably reliable way to increase one’s wealth, it does entail risk and too many investors lose rather than win.
  • The daily price of any stock is subject to the emotional whims of market investors.
  • On a daily basis, the stock market is not predictable.
  • "Hot tips" and rumors are notoriously counterproductive.
  • "Inside information" can be deceptive and is illegal.
  • Stock picking is risky, even for professionals.
  • Timing the market has proven largely unsuccessful.

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How We Can Help

  • By helping you clarify your investment objectives.
  • By determining your appropriate tolerance for risk.
  • By exploring several investment strategies to see which is most suitable for you.
  • By examining investment alternatives such as mutual funds (no load), annuities (fixed and variable), REITs and other instruments.
  • By designing an investment strategy to suit your objectives and temperament.
  • By helping you choose among several investment classes.
  • By Helping you obtain more income from your investment portfolio without reducing your overall return or increasing risk.

We can also provide you access to portfolio management firms with substantial experience, exciting investment strategies and demonstrable results.

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Asset Allocation: A Brief Guide to a Well-Used Strategy

Equity investment markets, whether in stocks or real estate, historically have gained value. But, that’s a very broad statement and ignores the reality that individual investments can falter and even decline in value. To defend against losing everything in any particular investment, people diversify. They don’t just invest in any one company—they invest in several companies on the theory that, while one may go belly up, most companies will prosper over time. The greater the diversification, the less the chance of being hurt by a few failures. Diversification is a defensive strategy.

But, in order to diversify effectively and to accomplish the goal of diversification, an investor needs a broad perspective on investment markets. Diversifying among airlines or among financial institutions or among oil companies (i.e., within an industry)  runs the risk of decline in that industry or simply a loss of confidence in that industry’s prospects. Diversification should be broader, identify classes of investments, and show how those classes relate to one another over time.  

Traditionally, market sectors have been groupings such as transportation, utilities, financial, pharmaceuticals, industrials, etc. More recently, companies are being classified and evaluated in different ways, such as large, medium or small; domestic or foreign; growth-oriented or stable and mature; and broad-based (such as GE) or specialty (such as Intel). A diversified portfolio will look for undervalued stocks and well as stocks with excellent prospects for growth in a wide range of sectors—because each of these sectors performs better than others under different conditions and at different points in time.

Unless the investor has a substantial amount of money available to invest, a sufficient level of diversification is difficult to achieve with stocks. Since mutual funds hold large numbers of stocks within the portfolio, a considerable level of diversification is achieved by using them. However, although there are broadly-based mutual funds (balanced funds or total return funds), many mutual funds are more narrowly based in a particular sector—such as large cap, growth, international, specialty, etc. In order to obtain the broad diversification applicable to the level of risk appropriate to an investor’s particular situation, the investment community has devised the concept of asset allocation. A model is devised for the investor allocating the investment capital to each of several sectors for which particular mutual funds—including bond and money market funds—are selected according to their characteristics.

A diversified investment portfolio, with money allocated in varying percentages among these sectors, might consist of investments in some or all of the following types of funds and products*:

  • Money Market
  • U.S. Intermediate Term Bond
  • International Bond
  • Large Cap Value
  • Large Cap Growth
  • Mid-Cap Value
  • Small-Cap Growth
  • Diversified Emerging Market
  • International Growth
  • Real Estate Investment Trust (REIT)

A portfolio can be designed for the long-term, regardless of what short-term economic conditions may occur (with the expectation that markets will perform according to historical experience over a ten year period), or it can be adjusted periodically depending on changes in the economy.

The above list represents a hypothetical allocation of money among several asset classes, designed to achieve a targeted performance result over a period of time with an anticipated level of volatility for the overall portfolio. The gains or losses in the overall portfolio are expected to lie within a pre-determined range.

A more aggressive allocation can be designed to achieve a higher result over the time period; however, the investor must be willing to accept a greater level of volatility—wider swings in the overall portfolio value. Conversely, the volatility can be reduced, but the investor must anticipate a lower return over the planned timeframe, as the allocation to lower-performing, less volatile, funds (e.g. intermediate term bonds) would be greater.

From our perspective, an asset allocation strategy is an essential approach to sound investing. From 1995 through 1999, the S&P 500 index**, representing the broad range of stocks, rose at an annually compounded rate of return of roughly 25% per year, but from the beginning of 2000 until the end of 2002, the same index fell roughly 30%—a very hard ride. An investor in large cap equity funds would have experienced the same ride, but an investor with an asset allocation that included money markets, bonds and real estate would have fared much better overall with less volatility.

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Resources for Learning More About Asset Allocation

For more information about asset allocation, we recommend Investment Policy by Charles D. Ellis or The Prudent Investor’s Guide to Beating Wall Street at its own Game by Bowen and Goldie.

For current stock prices, please visit Big Charts. For stock indexes, check Standard & Poor's.

For further information concerning any of these issues or how we can help you identify investment strategies to fit your goals, please contact us and we will send the information requested. We look forward to your call and will do our best to be helpful. Please indicate how you wish to be contacted (U.S. mail, e-mail or fax) and provide the following information:

Name • Address • Phone Number • Fax Number • E-mail address 

* This is an example only of funds that might be included in a diversified portfolio. Please contact for a current allocation that might be suitable to your particular needs and circumstances.

** The S&P 500 index is an unmanaged grouping of 500 of the largest U.S. Exchanges-listed companies and is used to approximate general stock market performance. You cannot invest directly into the index. Past performance is not indicative of future results.

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John Shellenberger

Securities through McDermott Investment Services FINRA/SIPC

© 2018 Estate Conservation Associates
14541 Kelly Canyon Road, Bozeman, MT 59715 • Phone: 406-585-5384 • e-mail: jshellenberger@mcdermottadvisors.com.

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