Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

asset allocation

What is a Conservative Investor?

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What is a conservative investor? It depends on who you’re asking. There seems to be a difference between what investment advisors and brokers believe is a conservative investor and what investors believe being conservative means. There are three basic types of investors today conservative, moderate, and aggressive. There are also tweaks to those three types like being ultra aggressive or ultra conservative. In this week’s podcast Tom and Brendan focus on the conservative investor and what they can expect when it comes to their portfolio.
What is a Conservative Investor?

The typical asset allocation model for conservative investors has historically looked something like 60% in equities and 40% in bonds/cash. Across the board this is what conservative portfolios look like for the most part. Tom and Brendan look at some numbers from 2013 so far to show what conservative investors have made.

The S&P 500 is up 23% year to date and the US Total Bond Market Index is down 4%. These are good gauges for the equities and bonds/cash that make up the typical conservative portfolio. So 60% of the account (equities) is up 23%, that’s a 13.8% gain. While 40% of the account (cash/bonds) went down 4%, that’s a -2.4% loss. Adding those numbers together gives us 11.4%. This gives us an idea of what conservative investors should expect to see out of their portfolio so far in 2013. Tom and Brendan also take a look at some numbers from recent years to show how typical conservative investors have been doing.

So what is a conservative investor, what does it mean to be a conservative investor, and what should conservative investors expect to get out of their investments? A lot of that depends on who you’re asking like we said before. The most important thing is that a client and their investment advisor have the same things in mind. When an investment advisor and their client are on the same page they can create a strategic plan. A good plan will include knowing whether to be conservative or aggressive, and will also have tactical elements to it. Investors need more than an asset allocation model that gives them a product mix. When the markets are on offense, defense, or in between there needs to be a steady game plan they can rely on. Learn more about this topic by listening to the weekly podcast.

Problems With the Traditional Asset Allocation Model Video

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There are some glaring problems with the traditional asset allocation model that investors should be aware of. Financial planners and stock brokers are big advocates of the traditional asset allocation model. Typically they will display the model to clients on a pie chart, and it will feature a 60/40 or 70/30 split in investments. The split in these allocation models is between growth investments and fixed income investments. The growth investments will be made up of large-cap, mid-cap, and small-cap stocks and mutual funds, as well as some emerging market funds and international funds. The fixed income investments will be made up of things like CD’s, bonds, and money market investments.

In this video Tom discusses the bigger problems with the traditional asset allocation model, and why it might not be the best investing strategy out there. Here at Mullooly Asset Management we place importance on knowing what sectors are doing well. We can clearly see this through use of point and figure charts. Visit our point and figure section to learn more about these methods and how we utilize them. One of the biggest problems with the traditional asset allocation model is that it places little importance on being in the right sector. Instead investors are spread into a variety of sectors, and their results suffer as a consequence.

Why the Traditional Asset Allocation Model Fails

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If you’ve worked with a broker or financial planner before, then you’ve most likely been subjected to their pie-charts. Asset allocation models have been displayed in this pie-chart format for a long time now. Tom and Brendan discuss these pie-charts in this week’s podcast, and more importantly talk about why the traditional asset allocation model fails.

The traditional asset allocation model has become very overused by brokers and financial planners. It seems as though no matter what firm you work with, they all recommend a similar blend of investments. Tom and Brendan break down what you’ll normally see inside of a traditional 60/40 portfolio.

60/40 means that 60% wThe traditional asset allocation model failsill be growth investments, and 40% will be fixed income investments. Out of the 60%, most of the growth investments will be large-cap stocks or mutual funds. There will be smaller percentages of mid-cap and small-cap investments as well. Another small portion of the 60% is usually made up of international funds, emerging market funds, or even gold sometimes. The other 40% of the portfolio is invested in fixed income. This tends to mean a blend of bonds, CD’s, and the money market.

The traditional asset allocation model fails for a handful of reasons. Tom and Brendan discuss a few of the biggest problems in the podcast. One problem is that over the last 12 years, small-caps have been the best performing sector. The traditional asset allocation model fails because it usually only has 15% of the portfolio invested in small-caps. Conversely, large-caps have lagged for much of the last 12 years. About 20% of a traditional allocation model is invested in large-cap funds. This means returns have likely been less than stellar. Another problem with the 60/40 portfolio is the money that gets invested into fixed income. 40% of the portfolio is invested in bonds, CD’s, and the money market. Right now, the money market is yielding basically nothing. Bonds also carry a tremendous amount of risk with interest rates on the rise. So should 40% of your portfolio really be invested in fixed income?

The bottom line is that the traditional asset allocation model fails because most brokers and financial planners don’t know which sectors are doing well. So instead, they spread your money (and the risk) around in a blend of investments. This is one reason why using point and figure technical analysis gives us an edge here at Mullooly Asset Management. The charts clearly indicate which sectors are favorable and unfavorable.