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Why a New Asset Allocation Approach is Needed

This week’s AAII Weekly Digest highlights these “must-read” AAII articles:

  • Why a New Allocation Approach is Needed: The traditional way of allocating portfolios costs investors significant wealth and fails to consider how risk actually occurs in the real world. In his forthcoming book, “Investing at Level3,” AAII founder James Cloonan challenges the traditional manner in which risk has been viewed and how investors have been told to allocate. He sits down with AAII Journal editor Charles Rotblut to discuss the reasons why he thinks a change in investment practices is needed.
  • The Advantages of Simple Asset Allocation Strategies: The phrase, “Don’t put all your eggs in one basket” is one that has been familiar to investors for thousands of years. It has been so since ancient Roman entrepreneurs diversified against the loss of their cargo by shipping trade goods on multiple merchant ships rather than on a single ship. When one is properly diversified, one is not overly concentrated in one investment. However, this article illustrates that complex allocation strategies do not significantly outperform simpler ones, such as equal weighting or a 60% stocks/40% bond mix
  • Lower Volatility Through Diversification: Since price movement has a direct impact on your wealth, it’s easy to focus on the volatility of a few individual stocks. What’s overlooked in such observations is how the volatility of different stocks can actually work together to reduce overall portfolio volatility. As long as the stocks don’t always fluctuate in the same direction or experience the same magnitude of price movement, the portfolio will be less volatile than the individual stocks that make it up. AAII’s Stock Superstars portfolio uses diversification to harness the volatility of individual stocks to lower overall short-term risk.
  • May AAII Asset Allocation Survey: Fixed-Income Exposure Continues to Rise: Exposure to fixed income in individual investors’ portfolios continued to rise last month, according to the latest AAII Asset Allocation Survey. May’s increase was the ninth in the past 10 months. Cash allocations rebounded, while equity allocations declined.

Our Member Question for this week is:

 

How would you rate the job being done by the Federal Reserve Board?

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Last Week’s Results:

 

Would you change banks or financial providers for better services with financial technology (FinTech) such as robo-advisers?

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Click here to learn about the results of last week’s AAII Special Question.

AAII Asset Allocation Models Mini Course

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At first glance, many investors assume that the basic asset allocation decision is easy. After all, at this level you are focusing on only three choices: stocks, bonds and cash (money market funds and short-term certificates of deposit). While the choices are few, the way you allocate your portfolio among these three categories will have by far the greatest impact on your performance of any investment decision you make, assuming that you don’t violate the basic investment principles. This mini course will help build your knowledge of asset allocation.

The AAII Weekly Digest is one of the many benefits of AAII membership. To learn more, consider a risk-free 30-day Trial AAII Membership to start becoming an effective manager of your own assets.

 

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