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What Is Your Strategy?
October 2, 2011
Bradley R. Newman, CFP®

The recent return of volatility, and the resulting daily triple digit increases or decreases in the Dow Jones Industrial Average (DJIA), is somewhat reminiscent of 2008 - 2009 and is likely rekindling your sense of uncertainty about both the stock market and the global economy. Has the return of notable volatility paralyzed you to the point that you can't make and execute a well thought out investment decision or are you making frantic changes in your investment portfolio in an attempt to capture/miss every daily increase/decrease in market value? Hopefully you don't fall into either camp.

What Is Your Strategy?
Are you comfortable creating an investment portfolio and then sticking with it, no matter what changes in the investment environment that unfolds around you? This describes a traditional 'buy-and-hold' investment strategy.

Do you feel confident that you can adeptly pick the best stocks, bonds and mutual funds at the most appropriate times for both purchase and sale, with the sole intent of maximizing the pricing movements of each discrete investment? This describes the methodology utilized under a 'market timing' strategy.

Are you looking to maximize market returns and minimize investment losses on a risk-adjusted basis over an extended period of time with regular, but subtle, portfolio adjustments based on market movements? This describes a strategy that is based on disciplined asset allocation changes.

The Appropriate Compromise
Given the aforementioned return of significant volatility, it is hard to imagine a return to the type of environment where a 'buy-and-hold' strategy could even be a consideration. The investment world is changing so rapidly, and in some cases permanently, that failure to adapt becomes very costly; both short-term and long-term. For example, prior to the financial crisis, the historic steady growth and high yields of bank stocks led to their significant concentrations in the portfolios of retirees; however, post-2008 their increase in volatility and virtually elimination of yields have made them inappropriate for most retirees.

At the other end of the spectrum, the sheer number of variables in the financial and economic markets makes it very difficult to effectively execute a successful 'market timing' strategy. Even over a short period of time, it is very difficult to 1) identify the investments that that are priced at 'below market' values and are poised to rise in value, 2) quantify the appropriate point when they have reached their 'full market' values and 3) execute the buys and sells at the appropriate times.

Asset allocation is the appropriate compromise between these strategies. A disciplined asset allocation strategy will provide clearly defined limits, both minimum and maximum, for all asset classes and will prevent you from moving to far into or out of any one asset class; a key focus of 'buy-and-hold'. At the same time, a disciplined asset allocation strategy will allow you, within the clearly defined limits, to overweight or underweight asset classes based on their current levels of attractiveness and risk; a key focus of 'market timing'.

Controlling Risk
Asset allocation is about controlling and managing risk, while maintaining appropriate diversification. In the most basic terms, that means overweighting asset classes that are providing attractive returns with lower levels of volatility, while underweighting asset classes with lower returns and higher levels of volatility. However, over time the real benefit is overweighting the asset classes that can provide the level of return needed with the lowest level of volatility possible.

Focus On What Matters
More aptly focus on what you may be able to control. While there are notable benefits to strategically changing your allocation in response to broad market movements, there is little point in trying to capture every minute rise and fall of the market, mostly because it can't be successfully done over a prolonged period of time. The real goal is to determine when certain asset classes of the market offer better values/opportunities than others.

While asset allocation is often used an industry "buzz-word", it is rarely done well within a clearly define process and it is difficult to achieve the desired results without the use of professional management. Disciplined moves among asset classes translate to proper asset allocation moves and ultimately the most appropriate risk-adjusted returns.

Bradley R. Newman, CFP from Roof Advisory Group, Inc., an independent investment management and financial advisory firm based in Harrisburg. The firm is a fee-only Registered Investment Advisor that provides portfolio management and financial planning services for individual and institutional clientele. The firm's email address is

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