Investment Basics

There are tremendous benefits to asset allocation and there is no denying it. The problem is these benefits are the exact opposite of what adherents and proponents of asset allocation consider them to be. In other words, if you utilize asset allocation (AA) as your investment strategy, it won't work. The way to derive benefit from asset allocation is to do the opposite of what this theory suggests.

There are two basic tenets of AA: 1) individual investment selection does not matter, and 2) the timing of investment does not matter. (Don't blame me - these are not my ideas, nor are they my strategy!) What asset allocators say matters is time in the market AND that you invest in the correct sectors and asset classes.

What this means is that asset allocators give no regard to what specific investments are purchased and it does not matter when investments are made. What this means is adherents to AA are frequently purchasing things for no business related, fundamental reason and they are selling things for no business related, fundamental reason. What this means is there are frequently mis-priced assets in the market. Whenever there is a disparity between price and value, opportunity for profit exists.

This creates a set of circumstances where good assets are, at times, priced below what they are worth, creating an opportunity to buy at reduced risk and with the potential for increased return. It also creates situations where assets are overpriced, creating opportunities to sell at prices above actual value. This also increases returns for the investor who purchased an asset early on in the price cycle.

The vast majority of investors seeking financial planning assistance are sold advice that is based solely on the principles of AA. Unfortunately, AA is a failed theory that compromised billions, if not trillions, of dollars of investments over the last three years.

The way to benefit from asset allocation is to recognize that those who practice and sell it, create real opportunity for investment profits, but only for those who don't use it.

Need a new (and effective) strategy? dana@thebarfieldgroup.com

Dana Barfield is the president of The Barfield Group, a boutique financial advisory firm he founded 20 years ago, that since inception has provided industry leading advice to business owners and investors. He writes frequently on a variety of subjects including business ownership, investment/retirement, widows, politics, economics and life. The point of all Dana's writings and work can be summed up in three questions: What is, has, or will happen? What does this mean and why does it matter? How should we respond as a result? View his other writings and contact him through http://laurusjournal.com.