Reality looks like this: Most investors will make emotion-driven changes to their portfolios. They swear off Fixed Income in 1982 at the beginning of a three-decade bull market. They abandon U.S. Equities in March 2009 missing a roaring five year (and counting) bull market. Dalbar research confirms that this is investor behavior. Asset classes can be out of favor for years or even decades. Spectacular stretches of capital gains are interrupted with excruciatingly painful periods of market losses. We implement a disciplined, tactical approach to asset allocation.

Our research shows that relative strength can be an effective method of building an adaptive approach to asset allocation. A relative strength data-driven approach to asset allocation allows portfolios to invest in multiple asset classes with flexibility. When asset classes are relatively strong, they end up in the portfolio. When they are relatively weak, they are removed. When all asset classes are weak against a money market benchmark, then cash is king and dominates the portfolio waiting for conditions to improve and opportunity to reappear. We receive many “doom and gloom” forecasts. They are all opinions. Many are logical, but they are all a big bet on “knowing the future.” (Knowing the future really is market timing). We do not know the future. We process the market’s known data and deal with it. When the “really smart insiders” start selling all they own, the data will reveal it. That will be the time to adapt. Every portfolio we have back tested for 2008 has confirmed this. When the data changes, our portfolios will change.

prop•a•gan•da: noun: Information, especially of a biased or misleading nature, used to promote or publicize a particular … point of view). Timing the market conjures up images of undisciplined, emotion-driven shifts in and out of the market. Ideally, it captures all of the up and escapes all of the down. Since ideal isn’t real, why not just diversify a portfolio and rebalance once a year? Won't that lead to fairly steady results ultimately reaching your retirement goals?

Your retirement plan starts out looking like this: Again, it is ideal in theory. There is a major problem with predetermining a portfolio’s diversification mix. How do you determine what the appropriate asset mix should be? Is it 50 years of data or 40? 

The frequent conclusion is a “balanced” allocation close to this: 

  • 40% U.S. Equity
  • 20% International Equity
  • 30% Fixed Income
  • 10% Commodity
  • 0% Money Market 

Looking at five decades of data misses just how much volatility there is in all the variables. When asset classes go through bull and bear markets, will you have enough patience and tolerance for losses to stay the course? Few will. Few have 30 to 50 years to find out if their planning worked out satisfactorily. ​

If it existed, retirement planning could be much simpler. Ideal is not reality so we must decide how to manage constantly changing conditions confronting us.

Here’s an adage investors have been exposed to for decades: "It's not timing the market that makes all the difference, it's time in the market." That seems like such a prudent statement, doesn't it? But, is it? In our former lives as brokers, it was an overused quote from mutual fund reps trying to keep money in their funds during declining markets. In retrospect, the adage could be reclassified as propaganda. 

Theory or Reality?

At some time in our lives, we have all wished we lived in an ideal world. ​

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