Asset-allocation is the selection of securities that are the end result of an investor’s portfolio discipline as it defines the important objectives, constraints, tolerance for risk and probable time horizon. We believe that there are several factors that can help to provide direction in this process but that each client’s asset allocation will have unique features. As we stated in our Sustainable Wealth Track piece, the five steps to achieve a safer, more sustainable spending rate during retirement include: education and expectations management, sufficient wealth to support lifestyle, a dependable spending plan, recognizing that portfolio results are market path dependent and remaining flexible when change occurs.
At Clearview, we approach asset allocation from a long-term perspective. Thoughtful planning allows us to set strategy once which is important because repetitive large-scale portfolio alterations are expensive, time consuming and often indicate a failed solution. Assuming we have successfully achieved the five steps associated with Clearview’s Sustainable Wealth Track, we can then focus specifically on asset allocation and its application within the portfolio.
Key Factors that Determine Asset Allocation:
Core Asset-allocation, the selection and percentage allocation to core asset classes such as equity, fixed income, cash etc. is the most important success factor though there are several limiting concerns such as client risk tolerance that may impact these allocations. Academic studies have shown that asset allocation accounts for about 90% of an investor’s long-term return.
Selection of securities or assets within each of these core classes is also of great importance. Proper security selection is key to long-term after-tax performance and is a must for portfolios to be competitive.
Limit expenses and managing costs includes: internal management fees, other layers of advisory fees, fund fees and costs, and custody fees. All of these expenses should be monitored as they diminish returns and can often be avoided. At Clearview, we manage most core assets internally and therefore charge only one very reasonable management fee, limit transactions costs and use custodians who charge no custody fees.
Tax-aware management helps support the best possible after-tax result for each client and this is our ultimate goal. Through the use of asset location management, dedicated harvesting of tax losses, holding period and tax lot management and wash sale avoidance, we can design an improved, more efficient portfolio that can maximize spendable dollars.
Reduce the impact of unexpected events when and where possible through adoption of the wealth track steps provided in the piece “Clearview’s Sustainable Wealth Track Policy.” Unexpected events can be managed if the portfolio is designed and implemented properly. We take a long-term perspective on client portfolios to mitigate the effects of random short-term events.
Asset-allocation is an essential part of the design of a portfolio and especially important when considering retirement. As we have indicated, it includes the allocations between stocks, bonds and other categories, securities selections, costs, tax-aware management and a sound and sustainable spending policy. We believe that portfolios with a practical, well designed asset allocation have a far better chance of performing successfully over the long-haul. Our role is to support clients by improving their ability to achieve those goals in retirement they have dreamed of whether lifestyle, gifting, travel or entertainment focused.