Dan’s Blog

Asset Allocation: 2013

Dan Calandro - Tuesday, January 14, 2014

It’s a brand New Year, and while researching this week’s blog I was reminded that it’s the same old story. In my travels I was drawn to two Wall Street Journal articles that appeared on-line over the weekend. They were advertised as such:

First, the only way to succeed without trying is to be lucky. And according to the first article that luck is defined as being one of the 5 million federal employees that have the benefit of opting out of the Social Security system and participating in a Thrift Savings Plan (TSP). TSP’s are also available to state and local government employees.  

Thrift Saving Plans are mutual funds run exclusively for government employees – and according to this WSJ  article, "The record of these funds is remarkable," as they generally outperform the S&P 500 by small fractions. This is so unlike the performance of conventional mutual funds available to non-government individuals, which experience failure rates between 65% - 80% in any given year. Only 10% of standard mutual funds outperform the S&P 500 over two years. In a nutshell, mutual funds are terrible investments – second only to Social Security.  

So the government mandates that you must participate in Social Security while they give themselves the option out of it and into Thrift Savings Plan. They reserve higher performing Thrift funds for themselves – while completely mismanaging a Social Security system they do not participate in – and then force 401k plans of non-government individuals to hold lower performing conventional mutual funds. 

Once again, that’s your government working hard for you.

The second article encapsulates the major problems in modern day mutual fund investing. It begins with the rhetorical question: "Think picking stocks is hard? Try picking a good mutual fund manager," and then goes on to explain a scientific approach to evaluating fund managers. While it is impossible to know the science behind the so called R-squared method featured in the article, it also offers want-a-be mutual fund owners this plain advice: "Investors should look for managers who are actually trying to beat their benchmark indexes."  

That’s right folks; unlike TSP fund managers many conventional mutual fund managers don’t try to outperform market returns. In other words, they plan for below-average results.  

It’s time to Lose Your Broker and set your sights higher!

When you experience today’s environment – sluggish and slowing economic growth, higher and higher taxes, and lackluster investment products from the Wall Street establishment – it’s easy to figure that you need an investment alternative that makes the most from what little you can control. Please note that unnecessary risks are not required to beat market returns – nor is the recipe complicated. (See my book for step-by-step instructions.)

Even though most mutual funds failed to outperform the Dow in 2012, it was a good year for stocks. "The market" gained 7% for the year amid dreadful economic conditions. Considering the year’s massive devaluation in currency, gold should have outperformed stocks last year – but it didn’t. Because of that, it was a bad year for gold.  

As mentioned in last year’s asset allocation blog, the market is ripe for gold and not so much for stocks.  And with the Dow trading so high in the action zone, investors should take special care in establishing allocations for the upcoming year. And even though it is a bad environment for currency – cash is still king. You can’t buy low without it; and no one has ever gone broke with it in hand. Cash is an essential mechanism to making money.   

At the end of my book I recommend a balanced approach to asset allocation if you’re not sure how diversify your capital. In the below example, a balanced approach sits in the middle of a "low-risk" and "high-risk" portfolio. Once again, only you can decide what allocation is right for you. These scenarios are simply to show you the effect asset allocation has on performance – and to demonstrate how easy it is to beat "the market" with less capital at risk.

In this example, risk posture is defined as follows:

  Low Risk Balanced High Risk
Cash 33% 33% 33%
Gold 50% 33% 17%
Stocks 17% 33% 50%
Total 100% 100% 100%

All three of these allocations outperformed market returns in 2012. All three had generous cash allocations and above-average 15-51 stock portfolios, the 15-51 Indicator to be specific. Here are the annual trend-lines in chart form.

1-14a

As explained in my book, all investment is long-term. One year does not make a track record. And while most mutual funds comprised of 100% stocks don’t consistently beat "the market", these multiple asset class portfolios make a habit of it with less capital at risk. Below are the same portfolios with five+ year trend-lines.

1-14b

As you can see, the "low-risk" portfolio marginally outperformed all other scenarios and "the market." This is because it was more heavily weighted in gold, which rose 169% over the 5+ year term. The 15-51 Indicator gained 127%; and the lowly Dow added just 7% over the multi-year span – and as we know, that 7% came in the final year, 2012.  

Looking forward, a very hostile environment awaits stocks in 2013: unemployment remains high and job growth is sluggish; global economies are under pressure and slipping into recession; taxes are rising at the federal, state, and local levels; and cost of goods is rising. Chronic fiscal mismanagement and monetary shell games by central governments everywhere threaten currencies and bode well for gold. 

As such, if you have a short-term horizon, say five years, it’s probably best if you lean towards the low-risk profile. If you have a long-term view, like ten to fifteen years, it’s safe to rest on the high-risk side. If you’re not sure what to do, the balanced approach will serve you well until conditions change.

Stay tuned…

ShieldThe road to financial independence.™


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