A recent article in the Personal Finance section of the Wall Street Journal had a prescription for anxious investors that Andy has been talking about for more than a year: consider asset allocation funds. Our Global Macro separate account has been very popular, partly because it allows investors to get into the market in a way that can be conservative when needed, but one that doesn’t lock investors into a product that can only be conservative.
The stock market’s powerful rally over the past year has gone a long way toward reducing the losses that many mutual-fund investors suffered in late 2007 and 2008.
But the rebound—with the Standard & Poor’s 500-stock index up 74% from its March 9, 2009, low—has done nothing for one group of investors: those who bailed out of stocks and have remained on the sidelines. Some of these investors have poured large sums into bond funds, even though those holdings may take a beating whenever interest rates rise from today’s unusually low levels, possibly later this year. Some forecasters, meanwhile, believe that stocks may finish 2010 up as much as 10%.
So, for investors who want to step back into stocks but are still anxious, here’s a modest suggestion: You don’t have to take your stock exposure straight up. You can dilute it by buying an allocation fund that spreads its assets across many market sectors, from stocks and bonds to money-market instruments and convertible securities.
While the WSJ article is a good general introduction to the idea, I think there are a few caveats that should be mentioned.
There’s still a big difference between a strategic asset allocation fund and a tactical asset allocation fund.
Many [asset allocation funds] keep their exposures within set ranges, while others may vary their mix widely.
Your fund selection will probably depend a lot on the individual client. A strategic asset allocation fund will more often have a tight range or even a fixed or target allocation for stocks or bonds. This can often target the volatility successfully-but can hurt returns if the asset classes themselves are out of favor. Tactical funds will more often have broader ranges or be unconstrained in terms of allocations. This additional flexibility can lead to higher returns, but it could be accompanied by higher volatility.
One thing the article does not mention at all, unfortunately, is that you also have a choice between a purely domestic asset allocation fund or a global asset allocation fund. A typical domestic asset allocation fund will provide anxious investors with a way to ease into the market, but will ignore many of the opportunities in international markets or in alternative assets like real estate, currencies, and commodities. With a variety of possible scenarios for the domestic economy, it might make sense to cast your net a little wider. Still, the article’s main point is valid: an asset allocation fund, especially a global asset allocation fund, is often a good way to deal with a client’s Market Anxiety Disorder and get them back into the game.
