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How Important is Asset Allocation? Part 3


Everyone using the strategy means everyone hit by market panic.

Editor's Note: This is the third in a series of articles. Part 1 can be found here. Part 2 can be found here.

Justin Fox writes an excellent blog entitled The Curious Capitalist for Time magazine. He quoted from, and wrote about, Tom Lauricella's Wall Street Journal article that I recently discussed. The article considers the proposition that asset allocation was no longer a satisfactory method for managing risk.

Justin claims it's not asset allocation as a strategy that failed, but "The main reason asset allocation failed is that it had become so successful. That is, everybody was spreading their money across the same myriad asset classes. So when the market panic came, it came everywhere."

A very reasonable explanation of asset allocation's failure to protect the value of investor's portfolio -- and Justin agrees that it's failed.

He goes on to discuss that "the most intriguing (and disturbing) element of Lauricella's story is the lesson some investors and consultants are drawing from it." Interesting discussion in its own right, but that part of the post is beyond the scope of today's discussion.

The Wallet, a blog published under the umbrella of the Wall Street Journal, recently contributed a post entitled Ditching Your Investment Strategy. The author asks readers whether they're ditching their long-time methods in favor of something new. And he's not referring only to asset allocation, but to buy and hold as well: "After the plunge of 2008 and early 2009, many rethought their beliefs about the age-old 'buy and hold' strategy as well, fleeing into gold, bonds and certificates of deposit instead."

The idea is spreading that the "tried and true" risk-reducing investment methods of yesteryear may no longer be viable today.

It's understandable that those who believe strongly in the idea that asset allocation, by itself, can minimize risk aren't going to give up that idea easily. But I've seen anecdotal evidence that suggests that financial planners who remain faithful to last century's idea are slowing losing clients to those who are willing to be more aggressive when choosing an investment methodology.

But, few adopt options strategies, and the more aggressive methods that are being assumed come with increased risk. Adopting methods that involve options -- the best risk-reducing investment tools on the planet -- remains near the bottom of the list of investment choices for the majority. There's no good reason why that should continue to be true. Along with helping rookies get started trading options with a solid education, this blog represents my effort to change that.

Next time I'll take a close look at another newspaper article describing how some financial planners have reacted to the events of 2008.
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