Asset Allocation is an investment philosophy that tries to stabilize returns over long periods of time. To accomplish this goal, investors align varied portions of their assets with different asset classes. Typically, an asset class will shine during particular economic environments. However, by design, there will also be a portion of the portfolio that appears to be not performing. This non-performer is likely to be tomorrow’s star.
As an analogy, let’s look at sports teams. There are times that the quarterback has a great game because of a number of factors: weather, opponent, health, etc. These same athletes can follow up that great game with a mediocre game, while another member of the team such as running back, wide receiver, etc. has the great game.
Similarly, Large Cap Growth stocks will perform best in certain economic cycles, only to fall into a period of time when they under-perform. Meanwhile, another asset class such as Small Cap Value stocks may have the better performance. Through the asset allocation philosophy, investors have exposure to these different asset classes at all times.
Looking again at the sports team analogy, it is the responsibility of the coaching staff to put a team together that can perform in a variety of game scenarios. To accomplish this, the staff selects top tier performers to fulfill a specified need. They don’t need the best athlete at each position, but one that will rank in the top third of available athletes for that position. Additionally, they look for specialist to fulfill those needs; they don’t select a running back that also can play tight end.
This is true of asset allocation, as well. Trust Point Inc. acts as the coach, selecting vehicles that represent specific asset classes. In this selection process, we look for investment vehicles that are true to their asset class and don’t waiver when another asset class becomes “hot”. In addition, we try to select investment vehicles that are competitive with their peer group and specific passive benchmarks.
Finally, as investors, we need to be cautious about selecting the hot performers. Hot performers do not always guarantee success. Basketball enthusiasts might remember that Michael Jordan used to post extraordinary individual statistics, only to have the team achieve limited success. It wasn’t until Phil Jackson installed a philosophy and complementary athletes, did the team achieve success.
The articles and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual.