After last year’s disastrous decline in all investment sectors, one of the worst years for investing since the 1930s, financial advisers are seriously rethinking traditional diversification and modern portfolio theory, The Wall Street Journal reports.
“We’ve always been proponents of modern portfolio theory, the idea that everything derives from asset allocation,” said Steven Enright of Enright Financial Advisors. “But 2008 is the first time this really didn’t work to hold up portfolios. So while we haven’t been torn away from modern portfolio theory, 2008 has made us think we should modify the way we do things a bit.”
Likewise, Brian Kazanchy, chairman of the investment committee at RegentAtlantic Capital, said, “Making tactical changes to the asset allocation—overweighting here or underweighting there—can add a lot of value, and it’s not like jumping in and out of stocks to capture short-term gains. It’s based on research on valuations and long-term trends.”
Some financial planners have decreased their core holdings so that they have more flexibility to shift the high growth portion of their portfolio. Many are turning to flexible, broadly based mutual funds, including index funds. Exchange-traded funds frequently figure more greatly in portfolios, too, since they can be traded intraday and are so low cost. Sectors that planners currently like include emerging market, foreign and small-cap stocks, bonds and commodities, including precious metals.
Other professionals predict that stocks are unlikely to return to their historical highs, due to a slow recovery, slim corporate profits and a more volatile stock market.
The traditional portfolio allocation of 60% stocks and 40% bonds “is almost like Betamax videotapes. It’s now passé,” said Andrew Silverberg, co-manager of the Alger Balanced Fund. “It gained popularity while we were still in a bull market.” He is a proponent of “more dynamic” asset allocation.
Also in this camp of taking a flexible approach to investing is Steven Romick, manager of the FPA Crescent Fund. “Any kind of strict percentage allocation doesn’t make sense. It’s just ridiculous,” he said. He has 27% of his portfolio in cash, 38% in stocks, 28% in corporate bonds and 7% in shorts.