Financial Forum

This series, Financial Forum, is presented by Pro Advantage Services, Inc., a subsidiary of Pharmacists Mutual Insurance Company, and your State Pharmacy Association through Pharmacy Marketing Group, Inc., a company dedicated to providing quality products and services to the pharmacy community.

THE COMPELLING CASE FOR ASSET ALLOCATION

A new era of investing has begun. The times when we could blindly invest in indexes and expect strong returns are gone. Instead, this new investment environment requires a more sophisticated, active approach to generating attractive return potential and controlling risk. This approach is asset allocation.

What Is Asset Allocation?
Asset allocation is a method for determining what mix of investments is likely to produce the most appropriate returns for a given level of risk. The idea is to invest in the right blend among stocks, bonds and cash and to adjust the mix as market conditions change.

For example, a growth portfolio might be invested 70 percent in stocks, 20 percent in bonds and 10 percent in cash equivalents. If the market outlook for stocks deteriorated, the mix might shift to 50 percent stocks, 30 percent bonds and 20 percent cash.

Why Is Asset Allocation Important?
A study performed in 1986 found that over 10 years, more than 90 percent of the difference in returns among a group of large pension plans resulted from decisions about the asset mix, rather than from security selection. Such studies indicate that getting the asset mix right is the most important part of successful investing.¹

In 1988, the Nobel Prize in Economics went to Harry Markowitz and others, who developed a statistical model called the Capital Asset Pricing Model (CAPM). The CAPM indicates that a mix of stocks and bonds can potentially provide significantly higher returns, with less risk, than an all-bond portfolio. The CAPM also indicates that while the long-term return of a mix of stocks and bonds is not as high as the return of an all-stock portfolio, the volatility of a blend of stocks and bonds is substantially lower than with a pure stock portfolio.

While asset allocation/investment timing cannot eliminate the risk of fluctuating prices and uncertain returns, it seeks to improve on a static blend by making tactical shifts among asset classes -- to improve the balance of return and risk.

Ongoing Discipline
Successful asset allocation involves looking at the market as a whole and evaluating a wide variety of indicators to determine which types of investments are most attractive. Investor psychology, monetary conditions and market valuation combine to produce a complete outlook for the market.
Psychological and monetary indicators suggest where investors are going and which assets are likely to generate attractive returns.² Market valuation indicates the expected magnitude of any move in the markets.

How Can You Use Asset Allocation?
You can implement asset allocation in your own portfolio in several different ways. Custom asset-allocation recommendations are available for individual clients to identify a mix of stocks, bonds, cash, and even international securities³, that fits their goals and objectives. An investment professional trained in providing asset-allocation advice should be consulted.

Provided by courtesy of Pat Reding, CFP? of Pro Advantage Services Inc., in Algona, Iowa. For more information, please call Pat Reding at 1-800-288-6669.