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How Important is Asset Allocation? Part 2

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How does an individual investor reduce the volatility of an investment portfolio and avoid devastating financial losses?

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Editor's Note: This is the second in a series of articles. Part 1 is here.

Tom Lauricella, writing in the Wall Street Journal, caught my attention with 2 recent articles. The first discussed whether asset allocation should still play a vital role for all investors:

"Asset allocation, a bedrock of investing for decades, appeared to fail miserably in 2008. The conviction shared by most investors -- that they should spread their money across myriad asset classes to minimize losses -- was shaken as nearly all markets tumbled in unison ...

"Many investors came away from the carnage believing that last year was an anomaly ... But a number of influential investors and analysts ... argue that asset-allocation strategies are fundamentally flawed. This wasn't a one-off failure, they say, but one that's been long in the making."


As Tom notes, not everyone agrees. But asset allocation is a fundamental concept. It's part of modern portfolio theory. Diversification and asset allocation were gospel. Now there's some doubt.

The second article was published just 4 days earlier.

Trying to develop new funds for retirees, Deutsche Bank's (DB) DWS Investments executives chose an okay strategy but they ran into problems.

"The experience at Deutsche Bank's DWS Investments ... reflects the challenge facing mutual-fund companies and life insurers as they try to transform volatile stocks into stable investments that offer retiring baby boomers predictable income or protection from losses. As if that isn't hard enough to accomplish, they are trying to do it at a low cost to investors and in a way that doesn't lock up money for years, as has been the case with many traditional guaranteed investments such as annuities."

Let's see, the 4 goals are: stable investments, protection from losses, something that's not difficult to accomplish, something that doesn't lock up money for years.

If we stir the pot and put our minds to it, perhaps we can discover a way to accomplish those 4 goals. I know it must be a very difficult problem because the top brains at banks, mutual funds, and financial firms everywhere can't find an answer.

Eureka! It's not difficult at all. Why can't these highly paid investment professionals see the attractiveness of creating a series of funds based on the conservative collar strategy? Wow. Can it really be as simple as that?

Collars protect the value of an investor's holdings by establishing an adjustable minimum value for a stock market portfolio. They cost very little (if any) cash out of pocket. And they allow for limited growth when the markets move higher.

Can it really be that easy? Isn't owning insurance a far better method for protecting your assets than spending a lot of time on asset allocation and diversification? (These aren't to be ignored, but they're far less important than you've been led to believe.)
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No positions in stocks mentioned.

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