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Safeguarding Your Asset Allocation

“I think sticking with an allocation is more important than getting the allocation exactly right in the first place.” — financial advisor/writer Allan Roth, at the 2013 Bogleheads reunion/conference.

The average investor underperforms his/her own funds due to jumping back and forth between them at exactly the wrong times. In other words, most people would have better investment performance if they simply crafted an asset allocation, chose some funds to implement that allocation, then stayed put.

Staying put, however, can be difficult. That’s why it’s often worthwhile to take concrete action steps to safeguard your allocation — that is, to improve the likelihood that you will stick with your portfolio as planned.

Making It Easier to Stick With Your Plan

For some people — those with the most fortitude — simply creating a written Investment Policy Statement is sufficient. Once they have an explicit plan in writing, they’re able to stay put.

Some investors (me, for instance) find that using a balanced fund or other all-in-one fund makes it easier to stick with the plan. According to Morningstar research, investors in balanced funds tend to trail the performance of their funds by less than the amount by which investors in other funds tend to trail the performance of their funds. Based on correspondence from readers, I think there are two primary reasons why all-in-one funds make it easier to stick with a given allocation:

  1. Because the portfolio doesn’t require any ongoing maintenance, there are fewer opportunities/temptations to tinker, and
  2. There’s no longer the stress (and temptation to make a change) that comes from seeing one or more funds in the portfolio perform very poorly over an extended period.

For other people, avoiding news about the market is the key to staying the course. This is another strategy that I personally use. I don’t check my portfolio balance more than once a month, and I never check the market’s daily performance. I find that it’s much easier to avoid worrying about a bad day in the market when you don’t even know that it happened.

For some people, the only way to stick with an investment plan is to hire an advisor to manage the portfolio. If you know that you’re somebody who, left to your own devices, would likely mess up the implementation of your investment strategy, hiring a low-fee advisor can make a whole lot of sense.

Finally, the selection of the allocation itself does of course play a big role in your ability to stick with it. Most investors will find that it is better to err on the side of being too conservative rather than too aggressive, given that, for most investors, it is more difficult to stick with the plan in bad markets than in good markets.

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