“If a financial plan is the roadmap, then asset allocation is the road itself,” said E. Stanley O’Neil, Former CEO, Merrill Lynch in The Top Five Wealth Management Needs of Investors, June 15, 2001. The basic investment principle of asset allocation was conveniently forgotten by the financial services industry during the technology bubble that caused the 2000 market downturn. Failure to use reasonable asset allocation strategies remains a problem today. This year billions of dollars have been lost due to incompetent investment advice that has ignored the importance of asset allocation.
Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining the mix of assets to hold in your portfolio is a very personal one. However, if your portfolio consists of heavy concentrations in stocks or stock mutual funds, it is very likely that the assets in your portfolio are not allocated properly.
If you are like most and leave seemingly complex tasks like asset allocation to your trusted broker, you need to know that the brokerage firm can be held liable for the losses that result in your account. Even though account statements can be difficult to understand, they are usually pretty good about identifying which investments are stocks, bonds, cash, and other asset categories. For example, to determine how your portfolio is allocated in stock simply identify the current value of the stock portion of your portfolio (including stock mutual funds) and divide that amount by the total value of your account. That will give you the percentage of your portfolio which is allocated to stocks. The same can be done for the other asset categories in your portfolio.
Morgan Stanley advertised on its website that a good rule of thumb for determining proper asset allocation is to subtract your age from 100 and the remaining amount is the percentage of your portfolio that should be invested in stock. For example, a 60 year-old person’s portfolio should not be invested in more than 40% stock. The remaining 60% should be invested in bonds or cash. While this is not an exact measure, it serves a good way to gauge whether your portfolio is out of whack.
In fact, all of the well-known brokerage firms such as Merrill Lynch, Morgan Stanley, UBS, etc. have internal asset allocation models that should be used as a guideline by their brokers. When a brokerage firm’s advice to customers deviates significantly from its own internal models or similar recognized models, there a basis for legal action to recover losses.
Asset allocation is the right path for your retirement well-being. Everyone should do a quick check to make sure your broker is not putting your retirement assets at unnecessary risk.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing individual and institutional investors regarding their investment problems. For further information, please contact us.