Monday, August 20, 2007

I repost this after every sell off...."the Talk"

Repost from September 22,2006

Time to get started Part 3 the Talk: "Asset Allocation"
September 22, 2006


This is when most investment professionals give you the talk; you know the talk about how you should be diversified into different asset classes. I think this is the most over used bunch of BS the investment community throws at investors and I have a bit of a different take on asset allocation.

First and foremost it is important to recognize that for new investors with small amounts of money asset allocation becomes a meaningless gesture, as a new investor you need to concentrate on building your asset base so you have something too diversify with. Secondly if you were an investor in the early 2000 during the market melt down you noticed that everything you owned no matter what it was or where it was invested sold off and if there is one thing we learned from the bubble bursting in 2000 was that in a serious bear market asset allocation does not work. I will repeat that in a serious bear market asset allocation does not work.

For many investors some asset classes are just not viable or not suitable or simply conflict with the investor’s investment style or risk tolerance. There is also the practical problem that some asset classes remain in very long periods of Bear markets and from time to time arise for very short Bull runs leaving investors buying at the highs and selling at the lows more often than not. And finally I have come to think that most asset allocation models are set up to feed money manager’s businesses not increasing investors return .It is more about the money manger full employment act than anything else.

For most investor’s assets the allocation process can be accomplished with the use of common sense ie… large cap, mid cap and small cap or Aggressive Growth, Value, Fixed income or Energy, Technology Consumer Products. It is most important to not to violate the viability, the suitability, your investment style or your own risk tolerances.

Another important issue is to make sure the funds are not all holding the same stocks .I know this sounds silly but the dirty little secret of the mutual fund business is that most of the larger mutual funds can only buy certain stocks that have a large enough capitalization that allows the fund to purchase a significant amount of shares to effect change in the total portfolio of the fund. With careful observation most investors will notice the same 10 stocks in every fund they own .Now that’s not much diversification is it?

Another hole in the Fund Manager Full Employment Act (Asset Allocation theory) has popped up in recent months, according to Bloomberg News, ”The average daily correlation of returns for Morgan Stanley Capital International's World and Emerging Markets Indexes has climbed to the highest since at least 1988. The S&P 500 and Japan's Nikkei 225 Stock Average, along with the Nikkei and Europe's Dow Jones Stoxx 600 Index, are tracking each other's daily returns by the most since at least 1987, data compiled by Bloomberg show. Shares in the U.S. and Europe have the second- highest correlation in 20 years.” Also according to the same source this year, the average daily correlation between the MSCI World gauge tracking developed markets and MSCI's measure of emerging markets increased to 0.87, according to Bloomberg data, which dates back to 1988 for that comparison. A correlation of 1 means stocks are in lockstep, while minus 1 indicates stocks are moving in opposite directions. So it seems proof that global markets are more correlated than ever before. As I have said many times when your broker gives you the talk (Asset Allocation Theory) better take a walk.

Thank you again for all the referrals you have passed my way the last couple of months I really appreciate it.

Through I am entering in to an agreement with Elliott Wave International to provide additional content on Elliot Wave Specific strategy and commentary. Contact me if you are interested in using the Elliott Wave to more effectively manage your portfolio.

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