Wouldn't It Make Sense To Consider The Asset Allocation Models Used By The Professional And Institutional Money Managers...
... when Considering Asset Allocation Models for Your Own Investment Portfolio?
After all... these guys are the "big dogs"... they are the "pros".
Wouldn't it be smart to see how people who are smarter (or perhaps just more educated) than we are handle their money? Or in other words... what asset allocation models do they use?
These professional and institutional money managers have experience, knowledge, and huge responsibilities to their members.
They have successfully managed large corporate, public (such as those for government employees), and union pension plans for many years.
They have solid track records through both good economic times and bad economic times.
And... they all have one thing in common...
They are basically all in agreement as to how their assets should be allocated.
In other words, each of their asset allocation models are for all practical purposes... the same.
So why should we try to reinvent the wheel?
The most commonly read financial and money magazines primarily print information about how... the guy next door to you is managing his finances.
Their focus is on... the hot item of the day.
Really now... is that where you want to get your lead?
Lets look at the asset allocation models of the Professionals and then compare that with how individuals do it.
As reported by Pensions & Investments magazine, the managers of the nation's 1,000 largest pension funds allocate their plans' assets as shown in this table.
Notice that all of the institutional investors are basically in agreement as to how to allocate their assets.
Let me point out a few observations about this table.
1. The fact that unions invest substantially fewer assets into international stocks than both corporate or public is a political decision... not an economic one.
International stocks are somewhat counter to the union philosopy and may be hard to explain to the members.
2. Unions tend to invest slightly more conservatively than corporate and public pension funds.
This is due to the nature of its members.
Even yet, the allocation model used by union pension funds does not differ much from the others.
3. Each group includes real estate in the portfolio.
However... since real estate is not readily liquid... they hold real estate to a relatively small portion of the total portfolio assets.
4. Each maintains a certain amount of its assets in cash. But only enough to meet it's liquidity needs.
Every pension fund will have employees or members that each year will die, quit or retire. They therefore must keep enough cash on hand to address those payouts.
All of the rest of their assets will always be fully invested.
5. Another important characteristic... not shown in the chart... is that pension fund managers normally place no more than 1% of assets in any one security.
Now... let's see how individual consumers allocate their assets.
According to the Employee Benefit Research Institute...
This table shows how employees who are participating in the nation's 1,000 largest company retirement funds (401k for example) allocate their assets.
Again you will notice similarity among the Corporate, Public, and Union employees allocations.
However... they are not as consistent in their asset allocation models as were the professionals.
Here again... are a few observations...
1. As you can see... compared to the institutional managers... corporate employees invest far too much money into stocks. Even far more than either public or union workers.
This is very dangerous especially when you consider what stocks those corporate employees are buying.
2. Even though the Pros rarely place more than 1% of assets into any one stock... corporate employees typically place 34% - 42% of their assets in one stock.
That one stock is... the stock of their employer.
The only reason is... because they work there.
This is very risky. Remember ENRON?
3. Workers have far too little money invested in international stocks.
Union workers can justify this on political grounds.
Public and corporate employees cannot.
Failure to invest internationally prevents you from investing in:
- 7 of the world's 10 largest financial companies
- 7 of the world's 10 largest insurance companies
- 7 of the world's 10 largest utilities
- 8 of the world's 10 largest appliance companies
- 8 of the world's 10 largest auto manufacturers
- 8 of the world's 10 largest chemical companies
- 8 of the world's 10 largest machinery companies
- 9 of the world's 10 largest electronic companies
- 9 of the world's 10 largest banks
4. Individual investors typically own no real estate.
Even if you don't have or don't want to own say rental property or raw land... you can still participate in real estate via Real Estate Investment Trusts, stocks of Mortgage Lenders, Builders or Developers, and Mutual funds that invest in the real estate industry.
5. Individual investors have far too much money in cash.
Cash earns such a low return that if you have too much of your portfolio in cash you will greatly reduce the overall return on your portfolio.
Consider closely your real cash need and invest the rest more effectively.
It is my opinion that we as individuals can benefit greatly by understanding the asset allocation models used by the Professional and Institutional Pension Plan Managers.
Their asset allocation models illustrate broad diversity and balance. They have been tested over long periods of time. And... they have weathered all types of market conditions.
You can benefit from their experience.
Consider your own portfolio and how it is allocated.
Remember... everyone's situation, risk tolerance, timeline, and goals are different.
Use the asset allocation models of the Professional Investors as a general guide.
It's a great starting point.
choosing funds page on this website.
And then... get with your financial adviser to further consider whether adjustments to your portfolio allocation would be appropriate for your situation.
"Because It Matters"... Jim
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