I have written many times about the importance of asset allocation and suggested that investors monitor theirs to make sure their portfolios are not too risky or aggressive.
And many readers have written me over the years, giving their ages and financial goals and asking whether their asset allocations were appropriate.
In most cases, there wasn’t enough information to make a determination.
More to the point, I’m not allowed to give personal investment advice. And that’s a good thing since I know only a small percentage of my nearly 700,000 readers.
Some noted that asset allocation is a term they often hear but don’t fully understand.
“Asset allocation means diversification, right?” asked one reader.
An S&P 500 index fund is broadly diversified. (After all, you own 500 companies.) But unless your goal is to be 100% invested in large cap U.S. stocks, it’s not your best asset allocation.
Asset allocation refers to how you divide your portfolio among different noncorrelated asset classes, such as foreign and domestic stocks, high-grade and high-yield bonds, real estate investment trusts, Treasury Inflation-Protected Securities (TIPS), etc.
Studies show that your asset allocation is responsible for nearly 90% of your portfolio’s long-term return. (The rest is due to factors like security selection, investment costs and taxes.)
Not knowing your asset allocation – or whether it is appropriate for your circumstances – is a fundamental mistake. (And fundamental mistakes are the hardest to bounce back from.)
Many of the individuals asking these questions might benefit from a managed account.
Historically, only institutional investors used professional money managers to run their portfolios.
Until recently, individual investors could access these managers only through mutual funds, unless they had millions to invest.
But in recent years, investment minimums – and, just as importantly, costs – have come way down.
So managed accounts are now a viable option for plenty of investors.
Here’s how they work…
When you open a managed account, you sign a limited power of attorney to let an investment professional run your portfolio – or, at least, the portion that you turn over to him or her.
The manager begins by determining your investment goals, time horizon and risk tolerance. A 30-year-old’s portfolio, for instance, would look very different from an 80-year-old’s.
Here are the benefits of a professionally managed account:
- Custom asset allocation. The portfolio is constructed based on your personal investment goals, not a general strategy like “growth” or “income.”
- Personalization. The account manager will take into account your specific circumstances: age, experience, time horizon and risk tolerance, for example.
- Transparency. Unlike with mutual funds, you know what’s in your account. You can see what you own.
- Tax management. Your portfolio can be run so that taxes on dividends, interest and capital gains are minimized or eliminated. (Tax-free bonds, as one example, should almost always be state-specific.)
- Competitive fees. Account managers generally charge a flat fee rather than full-service brokerage commissions.
- Performance. Account managers often have favorable track records.
- Convenience. If you are too busy to give your investments the attention they deserve – or if you are an inexperienced or emotional investor – having a professional run your portfolio may be your best solution.
Who would not benefit from a managed account? Primarily do-it-yourselfers.
If you enjoy the investment process, have the time and expertise to implement your investment strategy, and – most importantly – are satisfied with the results, you don’t need to turn your money over to someone else to manage.
On the other hand, there are few hobbies more fraught with danger than horsing around with the money you’ve spent a lifetime accumulating – and plan to live on in retirement.
I recently spoke with Greg Galloway – president of Fund Advisors of America in Orlando, Florida – who runs many managed accounts based on the Club’s asset allocation and investment recommendations.
He said with a laugh…
Look, I’ll be the first to concede that managed accounts aren’t for everybody. However, I speak with a lot of investors who realize they could be doing a lot better than they are. They know they should asset allocate their portfolios, but they don’t. Or they aren’t sure how.
They don’t want to be over- or under-diversified, but we look at their portfolios and see that they are. They know they should run trailing stops behind their stocks, but they get distracted or forget.
Many of these people are smart, sophisticated investors, incidentally. They’re just too busy running a company, taking care of their families, traveling or pursuing other interests to give their portfolios the attention they deserve.
How about investors who say they can save money by doing it themselves?
“Sometimes true,” said Greg…
After all, you can trade stocks today for just a few dollars. But, remember, the most important question is “Am I satisfied with my investment returns net of whatever I’m paying?”
I often ask prospective clients, “If no one else would pay you to manage their money, are you really the best person to manage your own?” Their honest answer is generally a sheepish “No.”
In my view, whether you need a managed account really boils down to whether you like to grow your own tomatoes.
Stick with me a moment…
Some people are natural gardeners. They want to till the soil, plant the seeds, water them, fertilize them, weed them and, eventually, harvest them.
When they eat those tomatoes, they have the pride and satisfaction of knowing they grew them themselves.
Other folks are too busy, ill-equipped or simply uninterested in growing their own tomatoes. They just stop at the farmers market or the store and pick up a bag.
They don’t want to grow their own tomatoes.
If you’d like to learn more about managed accounts, here is a good place to start…
Greg Galloway and Rick Pfeifer of Fund Advisors of America (part of The Oxford Club’s Pillar One Advisors program) run managed accounts through Charles Schwab, using Oxford Club recommendations, among other strategies. They also offer a complimentary portfolio review. (Minimum account size is $100,000.) Greg and Rick can be reached at 800.438.3040 or 407.667.4729.
Incidentally, Oxford Club Members are entitled to discounts and special services at this firm.
We at Liberty Through Wealth are not brokers, dealers or licensed investment advisors. (We mention these individuals for informational purposes only and do not receive compensation for any arrangement you may eventually reach with them.)
In sum, managed accounts are an excellent choice for some investors. Others, of course, prefer to grow their own tomatoes.
The two are hardly mutually exclusive. Many investors turn their serious money over to a pro and keep a smaller account on the side for trading and speculation.
Either way, it never hurts to know your alternatives.
P.S. I recently wrapped up my Wealth, Wine & Wander Retreat through Amsterdam, Normandy and Paris. This morning, I had the pleasure of speaking with our second departure of this retreat, whose voyagers are just starting out on their journey. To see all the photos and updates from my trip and keep up with the second adventure, simply like The Oxford Club’s Facebook page and follow us on Instagram.
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