VOICES: Chris Walters, On Counterintuitive Asset Allocation
In theory, wealth advisers thoroughly interview clients before creating a strategic asset allocation, in order to ensure the resulting asset mix corresponds to a client’s financial goals and risk preferences. But I recently reviewed a number of asset allocations that were appropriate from an age perspective but questionable from a standpoint of the clients’ situation or inclinations.
Take the case of a couple in their early eighties with no heirs; he a retired economist, she a former university professor. Ordinarily, older investors are advised to maintain a relatively modest risk in their portfolio. However, this couple was confident that they had more money than they could ever spend, and did not require significant investment income. Their goal was to build as large an investment portfolio as possible to bequeath to a charity. They understood that this entailed assuming greater risk, but felt that if their $5 million portfolio lost even half its value, their quality of life would not be endangered.
The upside of assuming greater risk was that their favored charity might ultimately receive a larger bequest. The couple was willing to take that chance. Our team helped the couple create an investment portfolio diversified across a range of equities and other risk assets, with only a small allocation to fixed income.
Another example of counter-intuitive asset allocation is a 38-year-old man who had $15 million in investable assets due to the sale of a family business, and was looking for a new entrepreneurial opportunity. On previous advice, he had $15-million spread across a 70-30 blend of equities to fixed income, assuming that this allocation was appropriate based on his age. I observed that this would be appropriate for most people below the age of 40, but asked the young man to consider what might happen in the case of a severe market downturn.
I also pointed out that since he was intent upon assuming a high level of risk in a new entrepreneurial endeavor, it didn’t make sense for him to take on relatively high risk in both his investment portfolio and his new initiative. My team constructed a portfolio that contained risk assets, including hedge funds, but had ample fixed-income exposure and liquidity.
Then there was the couple, in their early sixties, with financial assets of $2.2 million spread across a 401(k) account and personal savings. They planned to retire in four years. Their aggregated asset allocation was divided almost equally between equities and fixed income, in order to help ensure that their assets could offset the impact of inflation over a lifespan that might extend another two or three decades.
However, the couple was concerned that the cash stream produced by this asset allocation, along with Social Security, would not generate the level of income they desired. They were also apprehensive that a significant equities market downturn at this point in their life would leave them with even less ability to generate income.
