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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, March 28, 2004
Some investors have accumulated nesteggs where it may be prudent to ease up on the equity investments they hold. Perish the thought; sell a few of them!
However, I can already hear the thunder and lightning unleashing the fierce storm of the year. And it feels like it’s heading my way.
The big question is why would anyone, in their right mind, sell equities after having held them through the recent bear market. Especially, as many of the equities have rallied nicely.
Well, there may be some good reasons to take such drastic action. Let's face it, today some portfolios still hold close to 100 percent invested in a variety of equities. Judging from portfolios I have seen, that is too high a level for most of those people.
The continuing dilemma is that these investors are not at ease with such high concentrations of equity investments. These levels require an investor profile in the aggressive to very aggressive ballpark. Clearly, a profile that most investors would not be happy with.
So, what actions can investors contemplate now?
Let’s revisit some fundamentals. Decisions about which asset classes to own have the biggest impact on investment portfolios. Yes, the biggest. Studies have demonstrated some important conclusions.
First, the mix of stocks, bonds and cash, explains on average 94 percent of the contribution to total returns. Next, stock selections explain on average 4 percent of the contribution to total returns. Finally, timing the markets explains on average 2 percent of the contribution to total returns.
This tells me that the high percentage bet is on asset mix. That’s the one I concentrate on for my client portfolios. Getting acquainted with the concepts of asset mix as they relate to your situation is priority one.
In my experience, the majority of investors can relate with a 40 percent to 60 percent allocation to equities, say stocks and mutual funds. The rest in fixed income, such as bonds and cash instruments.
The stock market rise may be an opportunity for some to ease up on equities, as the needs dictate. After all, we’ve had practically a non-stop bull market since early 2003.
I suggest that now is an appropriate time to do two things. Particularly, if the portfolio holds close to 100 percent in either equities or fixed income.
First, figure out or revisit what your suitable asset mix ought to be. Second, take the necessary steps to rebalance the portfolio components in line with your chosen mix.
Make asset mix your friend and ally. Adopt the mix that best suits your investor profile. For example, a balanced profile investor may allocate 50 percent to equities and 50 percent to fixed income.
Take action based on your need. If you are comfortable with your present asset mix, there may not be any reason to make changes. At the very least, review the mix and confirm that the path you’re on still makes sense in view of your goals.
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