Every investor should have an investment management system and many experts believe that dynamic value asset allocation investing offers the greatest benefits. Studies show that asset allocation is the single biggest determinant of portfolio returns. In other words, asset allocation is much more important than the individual investments within a portfolio. While stock picking is important, the vast majority of investment returns will be determined by the percentage allocated to asset categories.
Value Asset Allocation Investing
Value asset allocation investing strategies involve finding investments at prices that historically represent a favorable opportunity for capital appreciation. History shows us that when an investment reaches certain levels compared to earnings, cash flow, dividends, etc.; they can be overvalued or undervalued. When overvalued an asset category has a high probability of below average returns; and when undervalued an asset category has a high probability of better than average returns.
Active Asset Allocation
Instead of having a fixed asset allocation target the value investor should choose a dynamic asset allocation target that over weights undervalued asset categories and under weights overvalued asset categories. A tactical or active asset allocation strategy gives an investor the flexibility to move between asset categories depending on their valuation.
For example, let’s say an investor has an asset allocation target of 50% equities, 30% fixed income, and 20% cash when valuations that are neither overvalued nor undervalued. Now let’s assume bond yields fall to record lows and therefore bond prices are high. With a tactical asset allocation strategy that same investor may move to 50% equities, 10% fixed income, and 40% cash. Now let’s further assume equities become expensive also. That same investor may move to 30% equities, 10% fixed income, and 60% cash.
Investment Management System
Value asset allocation investing using a tactical asset allocation strategy is the investment management system that has made the Arbor Asset Allocation Model Portfolio (AAAMP) so successful.
Recommended Reading:
Stock Cycles Make It Hard to Walk the Buy and Hold Walk - OutOfYourRut.com
Valuation Informed Indexing – Stock Prices Should Rise 6.5% per year – ValueWalk.com
Buy and Hold: The Best Investment Strategy? – Blog.ArborInvestmentPlanner.com
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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