Why is Asset Allocation Important?
Investing correctly is deceptively difficult when you try to buy at the right time. An important concept is that the price of a stock is only as high as enough people want to pay for it relative to those that want to sell it. If no one will pay for a certain price, then price drops until enough people buy it to balance those that want to sell. Think of it as a two-arm scale with price on one side and pushing down on the other side is the weight of money people are putting into the price. When the weight is heavy, the other side (price) goes up. When weight is removed, the price drops.
One element of timing is to get in at the bottom of the market, then buy and hold. Are we near the bottom. Hardly, we have NEVER been higher. So we will write that down as a negative for stock market purchasing right now.
Somewhat analogous to entering at the bottom is entering early in the market up swing. Are we near the start of an upswing of a bull market. Hardly, we have recently eclipsed the longest bull market in USA history. So, we will write that down as a negative for stock market buying right now.
Another time to switch into equities is when few others are invested in equities. After all, the “early bird gets the worm” and we could get in front of the wave. Well, since 1980, the proportion of investor’s allocation has NEVER been higher. Many are “all-in” now so they will not likely contribute much more. So, we will write that down as a negative for stock market investing right now.
Another time to switch into equities is when others have plenty of cash to move into equities. After all, someone has to have money to buy the equities and if they lack disposable income or a stash of cash to invest, then how are the prices going to be bid up? Well, since 1980, the proportion of investor’s allocation in cash has NEVER been low. So, we will write that down as a negative for stock market buying right now.
As you all have done in the past, when we want to buy something, but do not have the money, we buy on credit. So, if investors have low credit balances, they can borrow money from their brokerage firm to buy stocks. Instant, but temporary, cash to invest. If the amount of credit held by investors was low, that could indicate investors could borrow to take advantage of the stock market’s rising prices. Well, in the last hundred years, investors have rarely borrowed as much as they are borrowing now. A few comparable years like 1929, 2000, and 2007 were years when Americans were comparably in debt to buy stocks. So, from where is the money coming to buy more stocks when Americans are invested heavily and have borrowed heavily?
What would happened if prices did not go up? Well the investor would need to pay the borrowed money back. Where would the investor get the money? They would sell their stocks. Hmm, do we want to be heavily in the stock market when so much money is borrowed to hold the prices up? I do not think so.
So, what is the best investment strategy today? We do not know the future and the market can go up further. One good strategy is to keep fully diversified, rebalance occasionally, and skew your holdings to preserve what you have rather than trying for a big win. In or near the retirement years, it is more about the return of your money and than the return on your money. Risk and return are both important when investing at any time.
This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products, Steve Blumenthal articles, and FAClient articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney.
Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888, steve@EricksonFinancialSolutions.com, if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.