The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns

CHAPTER 11

The Right Allocation

The further backward you look, the further ahead you can see.

Winston Churchill

The goal of asset allocation is to obtain a proportional relationship among the various asset classes that will maximize returns and minimize risk, while taking into account your individual situation and goals. Proper asset allocation, according to most experts, will help you reduce risk while minimizing the impact of a capital loss.

Today, everyone is on the asset allocation bandwagon. This includes legions of financial planners, mutual fund companies, 401(k) sponsors, and the media. Asset allocation blueprints are now routinely published in major newspapers and magazines. The writers all profess how great these plans are and how they can help you secure a sound financial future. But there are several problems with the typical recommended financial plans that have been pointed out throughout this text:

• Bonds do reduce risk, but they also reduce returns. Bonds have provided only a marginal return above inflation over the past 60 years.
• Adding international stocks can be beneficial for diversification, but only if the sectors added to the portfolio are different from the current sector weights within that portfolio.

Using a sector-focused strategy alongside recommendations for additional asset classes can offer an investor a path to better returns. Listed in the following sections are three model portfolios based on the tenets of this book. I recommend only three model ...