The Classic Long Term Investment Model

In a change of pace, today's post is a gift for the more passive retirement investor. I will share a common investing template used by Financial Advisors as well as the new Robo-advisors. If you are a "do-it-yourselfer" this info can save you tens of thousands of dollars in fees that would otherwise go to an advisor.

The basic portfolio strategy used by many FAs is based on Modern Portfolio Theory (MPT). The main idea is to diversify investments across various categories of global assets in order to reduce overall portfolio risk. This is accomplished by allocating dollars to a mix of equity and bond funds. People who have a longer investment horizon typically utilize a more aggressive investment approach which places a heavier weighting on equities. This weighting shifts gradually towards a larger weighting on bonds as you get close to your retirement date.

The following chart provides example fund allocations.

The strategy dictates that once you decide on your overall portfolio balance you allocate funds based on the percentages in that column. Every six months you need to re-balance your portfolio by buying and selling securities in amounts so that they again match the target allocation percentages. Any additional contributions made to the fund are done using the weightings specified.

Modern Portfolio Theory is the most widely accepted framework for managing diversified investment portfolios, however it has its limitations. One such limitation is the fact that it ignores the possibility of significant market selloffs. Overall returns can be improved by augmenting the basic MPT framework with a sound strategy for including volatility funds in the model, however I'll need to cover that in a future post.

The above chart can be very helpful, but if you are not willing or able to rebalance the portfolio then you will likely not be optimizing your returns. In addition, if you are someone who gets nervous and wants to sell anytime the market becomes dramatic then you may have difficulties sticking to an investment plan. One part of a FA's job is to keep you invested and on a plan to help prevent you from selling when it is not beneficial to do so (more on Financial Advisors below).

A Note On Financial Advisors
A good Financial Advisor will provide more that just the investment strategy offered above. They will also help open a dialogue about what financial needs you and your family have and help you develop and execute plans to achieve those goals. They can help you with things like saving for retirement, saving for a house, saving for education, budgeting, tax strategies, and develop custom investment solutions should you have specific needs.

A Note On Robo-Advisors
Robo-Advisors are good for people who want to just set their portfolio agressiveness and have the rest automated. You're still mostly on your own but the fees are much lower so it can be a good alternative to a traditional Financial Advisor for people with simple needs. Robo-Advisors like to highlight their tax optimization feature through something called Tax-Loss Harvesting. For anyone using a retirement account, Tax-Loss Harvesting is completely irrelevant because most retirement accounts are tax deferred.

The above information is for educational purposes only and is not financial advice.

. . . . . . . . . . . . . .

Stay up to date by having posts sent directly to your RSS feed or Email.