Asset Allocation Lessons: The 70% Inflation Solution

For investors only... and for speculators who need to invest their winnings.

Lesson One: Asset Allocation is an Investment Planning Tool, not an Investment Strategy... few investment professionals understand the distinction, because most think that Investment Planning and Financial Planning are the same thing. Financial Planning is a broader concept, and one that involves such non-investment considerations as Wills and Estates, Insurance, Budgeting, Trusts, etc. Investment Planning takes place within the Trusts, Endowments, IRAs, and other Brokerage Accounts that come into existence as a result of, or without, Financial Planning.

Lesson Two: Asset Allocation is a planning tool that allows the Investment Manager (you, if you have not hired one) to structure the investment portfolio in a manner most likely to accomplish the goals of each specific investment portfolio AND of the investment program as a whole. Asset Allocation is the process of planning how an investment portfolio is to be divided between the two basic classes (and only these two classes) of investment securities: Equities and Fixed Income. Security sub-classes have little relevance.

Lesson Three: Equities are the riskier of the two classes of securities, but not because of the price fluctuations that are their basic character trait. They are riskier because they represent ownership in a business enterprise that could fail. The risk of capital loss can be moderated or minimized in the security selection process and with a management control activity called diversification. The primary purpose for buying Equities is to sell them for capital gains, not to save them as trophies to brag about in chat rooms. They are less risky than other, non-fixed income endeavors.

Fixed income securities are less risky because they represent debt of the issuing entity, and owners have a claim on the assets of the issuer that is superior to that of Equity holders and their salivating class action attorneys. With proper selection criteria and diversification, the risk of capital loss is negligible and price fluctuations can be ignored except for the trading opportunities that they provide. The primary purpose of these securities is income generation, either for current consumption or for use later in life. Capital gains here should be taken?and bragged about in chat rooms!

Lesson Four: An Asset Allocation Formula is a long-range, semi-permanent, planning decision that has absolutely nothing to do with market timing or hedging of any kind. It is designed to produce the combination of Capital Growth and Income that will achieve the long-range personal (pay those bills) goals of the individual. Thus, it must not be tinkered with because of expectations about anything, or rebalanced arbitrarily because of natural changes in the market values of one asset class or the other. Thus, an asset allocation fund is an oxymoron.

Lesson Five: Asset Allocation is the only proven cure for inflation. If properly managed using "The Working Capital Model", it will almost certainly increase the level of portfolio income by more than the rate of inflation, which is a measure of the purchasing power of your dollars, not the dollar value of your purchased securities. Six figure portfolios allocated 100% to Equities are not nearly as inflation proof as those that are more balanced? see Lesson Six.

Lesson Six: In addition to the potential of failing to keep up with inflation using an Equity Only asset allocation, regardless of your age, greed management becomes much more of a problem. In a rising market, evidenced by more profit taking opportunities than lower priced bargains, investors tend to take positions in lower quality issues, current story stocks, newer issues, etc? just to be in there. A 30% or so Fixed Income allocation can be a major focus factor. How's that for throwing cold water on an ancient Wall Street maxim.

Lesson Seven: These are just some of the lessons to be learned about asset allocation.

Steve Selengut
sanserve@aol.com
steve@sancoservices.com
800-245-0494
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read" and "A Millionaire's Secret Investment Strategy

---

Buying a Home - Your BIGGEST Investment

This column has often focused on intangible investments like stocks... Read More

Holy Grail Investments

Every year I go to the Money Show in Orlando,... Read More

Investing In or Owning Drug Lab Properties

Clean Up (includes the insides and the outside of a... Read More

Get Wealthy With the Rule of 72

When it comes time to retire how many people would... Read More

The Basics of Tax-Free UK Financial Spread Betting

Financial Spread Betting (or Trading) offers a tax free method... Read More

Angel Investors: Who They Are & When Are They Appropriate

Angel investors are individuals who invest in emerging business ventures.... Read More

Almost Anyone Can Open A Roth IRA!

The Roth is kind of weird until you get used... Read More

Effective Advice For A New Generation of Investors

CATCHING A FALLING KNIFEOne of the most common mistakes made... Read More

For Entrepreneurs A SIMPLE Plan May Be Best

Q: I own a small decorating business and I'll be... Read More

Buying Florida Investment Properties and Where Its Hot

Relaxing in Style: Florida Investment PropertiesIn Florida, relaxing in the... Read More

Looking For a Safe Investment? Try a Certificate of Deposit

If you are looking for a safe investment and you... Read More

Invest or be Pink Slipped

Firing an employee seems to be easier and easier for... Read More

Angels, Are They Real?

They're real, but few survive. High risk investing is dangerous... Read More

Understanding The Real Rate of Return!

There is one indicator more than any other which determines... Read More

Planning for Retirement

Almost without exception, people don't start planning for their retirement... Read More

Stock Market Retirement Investment Plan

For a successful retirement investment plan to work in the... Read More

Success Trading for New Traders: What Does Bid and Ask Mean?

Do you ever wonder exactly what's going on in the... Read More

Why Do You Want to Become a Online Trader?

Motivational guru Tony Robbins teaches that the reason for doing... Read More

How Do I Start Investing Online and What Are Some Basic Tips?

If you are new to investing online, don't put your... Read More

Out-Of-State Investors Check List of Questions

The following lists of questions are suggested questions to ask... Read More

Annuity Investment - The Whole Truth

Do you ever feel like you haven't been told the... Read More

An Economical Retirement Investment Plan

The practice of economy, directed toward a retirement investment plan... Read More

Day Traders and Swing Traders and Options? Maybe!

Typical day traders and swing traders look for stocks with... Read More

Invest To Make Money, Not To Get Rich

The technology boom of the '90s romanticized the "rags-to-riches" ideal... Read More

Numismatics are for Collectors, Not Investors

As a precious metals investor, you may heard much about... Read More

Gold and Silver Maple Leafs Get New Packaging

Gold Maple Leafs and Silver Maple Leafs are receiving packaging... Read More

Variable Annuities

You know all the articles you read about annuities that... Read More

The Truth About Real Estate Investing - Is It Right For You?

You have probably been hearing, seeing and reading that real... Read More

Trading Baskets Part I

Q. What is a basket?A basket is a group of... Read More

Pros & Cons of Investing in Bonds

What are Bonds?A bond is a debt security, by which... Read More

Buy: Hold: Sell: Jump

I'm sitting here at my computer desk with a cup... Read More

Day Trading Strategy or Stock Trading Software? The Way You Pick Stocks Affects Your Results

The trading method you employ to approach the stock market... Read More

Makin The Sauce

Let's face it, you're on a roll. After getting down... Read More