One Pro's Take Part Two

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A reader left a very thought provoking comment on yesterday's post in criticizing the asset allocation featured in Barron's over the weekend. The reader wisely cautioned against being too conservative and said that the allocation laid out in the Barron's article was "a certain path to mediocrity."

First as far as being too conservative, in the end you need what you need and you either have enough or you don't. What is the difference between running out of money for being too aggressive or too conservative? You're out of money just the same.

However I believe that having the correct asset allocation is more important. If someone has the wrong allocation then they are more likely to succumb to emotion at the worst time causing a worse result than just being too conservative. One quick note is that asset allocation is not necessarily the same thing as conservative or aggressive. In generic terms a portfolio with 100% invested in equities with general characteristics that utilities stocks usually have is probably going to appear to be more conservative than a 50/50 portfolio where the equity portion is invested stocks that have characteristics associated with lottery ticket biotech stocks and the fixed income portion is all in high yield bonds.

As to the portfolio out of Barron's being mediocre, the short answer is that each of the segments in that portfolio could be managed such that they each dramatically outperform their respective benchmarks. Were that to be the case it would be incorrect to say the portfolio was mediocre.

It is very likely of course that the portfolio from Barron's would dramatically lag the stock market in a year like 2009 where stocks go up 25% and so someone might think the portfolio is indeed mediocre. However it seems plausible that such a portfolio could very easily have done very well on a relative basis in a year like 2008 where the stock market went down a lot and so the results would be far from mediocre.

In thinking about the above paragraph it would seem the word mediocre is not the right way to think of it. An asset allocation, which is what we are talking about, is either suitable or it isn't. In years past I talked about late 2008 being the wrong time to find out you had too much in equities--or put differently the wrong time to find out you had the wrong asset allocation.

An asset allocation along the lines of what was put forth in Barron's will be suitable for some portion of the investing public although it is clear that the commenter in question prefers some other allocation, probably one he views as being more growth oriented, the kind of growth that has been traditionally available from equities. In generic terms, the next time the market goes down a lot will a portfolio that targets 70% in equities be mediocre? No, it will just risk being down a lot with the market.