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February 9, 2021

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We had some excitement last week with the #wallstreebets group pushing a couple of hedge funds to the brink, literally forcing at least one hedge fund to find capital to stay afloat. We are starting to see those securities that rallied due to the movement start to decline now, which I believe was inevitable.  Regardless of how this ultimately turns out for the hedge funds, they have no doubt been put on notice. 

This week I want to devote some time to the old adage of investing and that’s Asset Allocation. With all the excitement of an election, stimulus and more recently the wallstreetbets movement, it would be easy to spend a lot of time devoting time to things that play a miniscule part in providing consistent long-term returns. Therefore, this week I’m devoting my time to the importance of asset allocation. 


I know. I’d like to tell you that I’m not that big of a nerd. I’d like to tell you that there is some strategy out there that can help you reduce risk, or steady the boat in the Investing Ocean, but I can’t. 

In my time managing money for others, the biggest factor I’ve found over the years that would help me provide returns while managing risk is the allocation to different asset classes, sectors and sub sectors.

S&P 500 Sector Performance

I can’t remember ever seeing the above graph that showed the asset allocation not somewhere in the middle, and that in a nutshell is what it does. Sure, I’d love to be right all the time and be all in the asset class that leads all the time, however that’s a pipe dream and ultimately just adds excess risk. 

The chart below is my favorite, and probably most used chart, for many reasons. However, in this case we can focus our attention on the grey bars. This bar represents a 50/50 stocks to bonds ratio, based on average annual return of each asset class. If you do the math, the dispersion of the returns between the lows and highs for the asset allocation portfolio is the smallest in every time-period, in a 20 year rolling returns dating back to 1950.

Range of stock bond and blended total returns.

Although the glass half full people will tell you that it never gives you the highest return possible, in the example above it’s never given you a negative 5-year period, which stocks and bonds on their own can’t say. 

So why would I tell you this now? Modern portfolio theory and the major funds would say that you rebalance yearly and what better time to do than the start of the year…and there is some merit to that.  However, I prefer to base it on major market moves and historical data, above 1 standard deviation, in either direction. As you’ll see from the chart below, we have crossed that line when forward P/Es crossed 20 times in Q 3. 

S7P 500 Forward P/E

Even bigger than the chart above, and whether me or anyone else thinks the market is cheap or expensive, true asset allocation is about you. It should relate to the timing of you needing the funds and your life expectancy, or the life expectancy of the legacy you are investing for. 

Asset Allocation

I tell you this as I feel complacency from both sides, the bulls and bears. Whether the basis is derived from politics, the economy or what the talking heads are telling you. When markets move one way or the other, pushing your asset allocation out of alignment, if you sit still, all you are doing is adding risk to your portfolio. The biggest risk to a portfolio in my mind is greed and fear, and boy has there been a lot of that in the past few weeks and months. Asset Allocation is the cure in both/all cases, not on the strike of a calendar, but based on the movements of the markets.

Please don’t take this as I’m waving the bear flag or saying a market move is imminent. As I’ve said, I believe the amount of stimulus in the economy now, makes it more and more unlikely of a major market pullback, however that does not mean that we should take on excess risk. Let asset allocation take the opinion and emotion out of investing.

With that said, here’s the Buy/Sell.

Buy sell

Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, F

Mick Graham, CPM®, AIF® Branch Manager Raymond James Financial Advisor Melbourne, FL

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