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The Pursuit of Top Investment Allocation Results

One of the key characteristics of Linden Thomas’s pursuit of top portfolio results is its allocation process. An efficient portfolio is made of several key characteristics intended to maximize results while simultaneously minimizing downside risk. One of the most important components needed when seeking superior long term results is beginning with the pursuit of top asset allocation.

This component, while often discussed, is rarely achieved by investors. The following are some of the key elements in the pursuit of top allocation results:

  1. Match asset allocation to long term risk and growth objectives
  2. Implement and maintain proper sector and asset selection
  3. Minimize unnecessary overlap
  4. Implement an appropriate re-balancing strategy
  5. Maintain discipline throughout the market cycle
  6. Understand and build around the drivers of long term results
  7. Deploy in an efficient manner
  8. Understand and build the portfolio to help manage the impact of pullbacks and recovery

To gain a deeper insight into each ingredient in the pursuit of top allocation results, let’s look a little closer at each:

  1. Match asset allocation to long term risk and growth objectives  In seeking a top allocation portfolio start with your individual goals, growth needs, recovery perspective and ability to assume risk. Properly balancing and planning toward these priorities can lead to shorter recoveries and more consistent results.
  2. Implement and maintain proper sector and asset selection  An understanding of the benefits and limitations of each investment is vital to proper allocation and investment selection. To position yourself to achieve top allocation results, a process must be used that considers the myriad of factors affecting allocation including their interaction with each other.
  3. Minimize unnecessary overlap  An efficient asset allocation strategy must be pure; this means that the portfolio must be examined to prevent overlap both on the sector and individual security level. The knowledge and research needed to execute this correctly is often under appreciated by investors which, in turn, can lead to a poorly executed plan or style drift after deployment.
  4. Implement an appropriate re-balancing strategy  A proper re-balancing strategy, implemented through targeted allocation movements or automation, must be in place if seeking to maintain a top allocation long term. This is because after your initial implementation your allocation may shift, so while at the onset your portfolio might have matched your intended objectives, over time this could change.
  5. Maintain Discipline throughout the market cycle  Many investors face the urge to chase last year’s results only to later discover they are this year’s disappointment. A well-reasoned and disciplined process is essential when seeking top allocation results as it both keeps you on track and prevents emotions from derailing long term results.
  6. Understand and build around the drivers of long term results  Past performance is not a basis for allocation decisions; the reason is a strong performance over a short time frame can often impact long term results. While reflection on historical results can be a benefit when measuring historical upside/downside capture risk, basing investment decisions on these past results alone seldom should be used to rotate into tempting areas of the market. Historically the pursuit of top allocation results is built on the recognition that an allocation is about more than past results, or timing; it’s about looking forward not backward.
  7. Deploy in an efficient manner  Certain investment products can hurt results and get in the way of your pursuit of top allocation results, deployment is about choosing the proper investment vehicles to implement the proper allocation and achieve better results.
  8. Understand and build a portfolio that focuses on helping to manage the impact of pullbacks and shortening recovery  You must have a thorough understanding of a strategy’s strengths and weaknesses prior to implementation to avoid these pitfalls, as a lack of understanding can lead to concentrating or abandoning an asset class at the wrong time. I believe top allocation results can only be achieved by staying the course, even in volatile markets.

To demonstrate that no two allocations are equal we have constructed two hypothetical 60/40 portfolios. The first is a poorly defined portfolio and the second is a more efficient enhanced portfolio. Many say that less risk is always associated with less returns but historical evidence proves the opposite is true. Below you will notice that not only did the more efficient enhanced portfolio have better long term results but it did so with less risk and a shorter recovery during volatile periods. Both portfolios are built assuming a $2,000,000 starting balance with a 60% allocation to equities and a 40% allocation to fixed income.

Disclaimer: This image does not show actual performance. Past performance is not indicative of future results. The chart is hypothetical and does not represent the actual experience of any client account.

Source: Data obtained through ZephyrstyleADVISOR

Disclaimer: This image does not show actual performance. Past performance is not indicative of future results. The chart is hypothetical and does not represent the actual experience of any client account.

Source: Data obtained through ZephyrstyleADVISOR

A Poorly Allocated 60/40 portfolio

Upside Capture 77.91%
Downside Capture 73.21%
Recovery time 39 months

Enhanced 60/40 Allocation

Upside Capture 84.31%
Downside Capture 55.70%
Recovery time 34 Months

The information above demonstrates three things. First, the enhanced 60/40 portfolio has less risk. We measure this using downside capture, or the amount the portfolio declined in relation to the market. Second, the enhanced 60/40 portfolio had better results. We measure this using upside capture, or the amount the portfolio went up in value when the market was up. The key to these two measures (upside/downside capture) is how they stack up against each other. Put another way, the upside capture is your benefit and the downside capture is the cost to obtain that benefit. Using the information above, in the poorly allocated portfolio you must accept 73% of the downside of the market to receive about 78% of the upside. Compared to the enhanced 60/40 portfolio (56% downside & 84% upside) it is apparent that the net results are far superior to the poorly allocated portfolio. Finally, the enhanced 60/40 portfolio had a shorter recovery. Because shorter recovery is essential to continuing to compound portfolio results, it’s imperative that down market recovery is shortened or minimized. The longer in the valley of poor results, the less likely you will achieve consistent returns. We measure this using recovery time, or when the portfolio declined in value how long it took before it reached its prior peak. In this example the poorly allocated portfolio took 5 more months to recover compared to the enhanced 60/40 portfolio.

Not all portfolios are created equal which can lead to dramatically different results. To see if your portfolio is properly aligned with your goals, and understand exactly what could be hindering your ability to achieve your desired results. To schedule a no-cost, no-obligation consultation, Contact Us or:

Call: (877)554-8150
Email: info@lindenthomas.com

Past performance is no guarantee of future results. Investing involves risk including loss of principal.
Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Linden Thomas and Company is a separate entity from WFAFN.

 

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Linden Thomas and Company
516 N Tryon Street
Charlotte, NC 28202
CONTACT US

© 2016 Linden Thomas and Company All rights reserved.

Phone: (704) 554.8150
Toll Free: (877) 554-8150
email us: info@lindenthomas.com

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Asset Allocation Strategy

Charlotte Location
Linden Thomas and Company
516 N Tryon Street
Charlotte, NC 28202
CONTACT US

Phone: (704) 554.8150
Toll Free: (877) 554-8150
email us: info@lindenthomas.com

Click here for directions/map

© 2016 Linden Thomas and Company All rights reserved.