Neal Templin’s column in today’s WSJ, “Honey, I Shrunk the Nest Egg,” is an excellent illustration of the need for Tactical Asset Allocation—even though, on the surface, his column had nothing to do with Tactical Asset Allocation.
“For years, my wife and I have had an understanding. Clarissa would spend the money, and I would save it.
Well, Clarissa is still holding up her end of the bargain, but I’m an abject failure. My company retirement accounts, despite what I thought was a relatively conservative mix, were down close to 35% in early March from the fall of 2007. That, in turn, forced me to do some painful thinking about how much risk I can stomach on my family’s behalf, and how much money we can expect to have in retirement…
My conclusion: My longtime portfolio allocation of 50% stocks and 50% bonds wasn’t safe enough. I’ve already begun gradually trimming back my stock position each time the market rises. When I’m done with this transition — and it could take a couple of years — I will have a portfolio that can better ride out storms. But it will also be a portfolio less likely to produce a big nest egg.” —Neal Templin
I suspect that millions of investors have come to the same conclusion as Mr. Templin—they intend to move to an allocation that is dominated by fixed income so that they never again have to face devastating losses in their retirement savings. Mr. Templin, and many others, make asset allocation decisions in order to create the “ideal” allocation, given their risk tolerance. Up until this bear market, Mr. Templin’s asset allocation consisted of 50% stocks, 50% bonds. Now, he will dramatically overweight bonds.
A Tactical Asset Allocation approach address the issue of managing risk from a totally different perspective. Instead of creating a static asset allocation, a tactical approach shifts exposure to asset classes based on the relative strength of each of the asset classes. Tactical Asset Allocation will certainly experience losses along the way, but it is a much more dynamic approach. Instead of deciding to be either aggressive, moderate, or conservative, a tactical asset allocation simply says that we’ll let the markets determine the allocation.
Here is my opinion on what will happen to those folks who overweight in fixed income. Over the next few years as rates increase, there principle value will decrease, they will freak out again because they thought they were not suppose to lose value in “safe” bonds, their nest egg will shrink on paper, they will sell a chunk of their bonds and move into cash. Having at the ned of the day lost even more money because they don’t understand how bonds work.
I agree with Aaron comment above. Overweighting on Fixed income will keep those folks freak out and scared of any type of asset allocation, they will eventually purchase some “great” annuity. Until they see these annuity companies start to default, because they can’t keep their eyebrow lifter guarantee returns. I don’t trust any of these annuities, I can see them starting to defaut sooner than we think. Agree?
No, I do not agree with your comment on annuities. The reason being is that these companies all have actuaries on staff that adjust the contracts when they can to account for the changes in the market. While some annuity companies may go out of business, their assets will simply be bought up by an insurance company that has a better balance sheet.