The term “asset allocation” often amounts to little more than financial jargon. When a magazine or a broker merely puts forward a “set it and forget it” portfolio — 70% stocks/30% bonds, 60% stocks/40% bonds — they are doing a huge disservice to the investment community.
At Pacific Park Financial, Inc., we recognize that there are a wide variety of assets beyond common stock and U.S. treasury bonds. That is why we begin with the notion that an initial allocation may have growth-oriented assets (e.g., common stock, foreign stock, commodities, equity REITs, etc.) as well as income-oriented assets (e.g., preferred stock, convertibles, foreign bonds, domestic bonds, pipeline partnerships, currencies, etc.). Income assets may also include cash and money markets for the safety of principal.
Growth and income “targets” for clients may initially begin at 75/25 for aggressive investors, 65/35 for moderate investors, 55/45 for moderately conservative investors and 45/55 for more conservative investors. Yet in “targeted asset allocation,” one recognizes the need to lower one’s growth exposure during times of extreme volatility and market-wide stress.
Clients of Pacific Park Financial, Inc. understand that we use stop-limit orders, as well as other risk management techniques, to protect portfolios. This practice often reduces the “growth” element, and may result in an increase of income-oriented assets as well as increase in one’s money market/cash position.
For instance, a moderate client may have had an allocation of 65% growth/35% income in 2007. During the first half of an ugly bearish downturn in the recession of 2008, the moderate client may have had ony 35% growth/65% income… with a portion of the income component in the safety of cash. As the subprime shock became more extreme and the global financial system found itself in severe jeopardy, it became necessary to further reduce risk; a majority of moderate investors weathered the “generational” sell-off with less than 25% growth/75% income… with a substantial portion of the income component in money markets.
“Targeted asset allocation” recognizes that there are optimal mixes in good times and reduced risk allocations in exceptionally troubled times. Pacific Park Financial, Inc. uses stop-limit orders, trend analyses and hedging to minimize the downside during those troubled times.
Equally noteworthy, there are periods when the good times aren’t just good… they’re great! And when those extraordinary uptrends are taking place, we may nudge the growth component slightly higher.
For example, a moderate client may see a 65/35 allocation rise to 70/30, whereas a moderately conservative client may move towards 60/40 from 55/45. In essence, “targeted asset allocation” recognizes the inherent benefit of an optimal risk tolerance based on a client’s needs, while incorporating the flexibility necessary for a rapidly changing investment world.
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