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http://blogs.wsj.com/financial-adviser/2010/06/14/voices-chris-walters-on-counterintuitive-asset-allocation/
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.
