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The Mutual Fund Observer’s Asset Allocation

By Ben Carlson, A Wealth of Common Sense

Asset allocation is the most important investing decision that rarely gets much discussion. Sure, investors are constantly talking about going all-in or all-out between stocks and cash, but that’s not really asset allocation, that’s portfolio suicide.

In this month’s Mutual Fund Observer, David Snowball talks about his own asset allocation:

All the signs point to stocks. The best time of the year to buy stocks is right after Halloween. The best time in the four year presidential cycle to be in stocks is just after the midterm elections. Bonds are poised for a bear market. Markets are steadying. Stocks are plowing ahead; the Total Stock Market Index posted gains of 9.8% through the first 10 months of 2014.

And yet, I’m not plowing into stocks. That’s not a tactical allocation decision, it’s strategic. My non-retirement portfolio, everything outside the 403(b), is always the same: 50% equity, 50% income. Equity is 50% here, 50% there, as well as 50% large and 50% small. Income tends to be the same: 50% short duration/cash-like substances, 50% riskier assets, 50% domestic, 50% international. It is, as a strategy, designed to plod steadily.

You might benefit from thinking about it.

Snowball goes on to highlight a T. Rowe Price study which shows that over a 65 year period this stock-light portfolio produced roughly 60% of the stock market’s returns but only about a quarter of the volatility.

At these interest rate levels I find it hard to believe that this type of portfolio could recreate these same results, but I don’t think that’s the point. What I like about Snowball’s asset allocation is that it’s very simple. I’m sure there are ways to improve this portfolio, but it’s the one that works for him. As most investors have found out the hard way, the simple portfolio you can execute is much better than the complex one you abandon at the first sign of market turmoil.

His reasoning for choosing this allocation is also worth pointing out:

Here’s the argument: you might be better with slow and steady, even if that means saving a bit more or expecting a bit less.

Think now about what’s in your long-term best interest rather than waiting for a sickened panic to make the decision for you.

An interesting perspective on a difficult decision for most investors to make.

Do yourself a favor and read the entire edition of this month’s MFO:
November Mutual Fund Observer