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Advisers often hide behind the smoke and mirrors of asset allocation

February 25th, 2014 

The week before last I held my quarterly client update brunch where I spoke about the economy, my current portfolio and what I see for the future.

One of the many things I discussed this time was asset allocation, a big selling point in the financial services field. Sorry to burst your bubble or offend financial advisers, but asset allocation is nothing more than a sales gimmick for financial advisers who don't know how to make their clients' investments grow.

Sorry to be so blunt, but it's true.

Most investment advisers, brokers, financial planners and insurance salesmen really don't know how to make your investments grow. They put your money into a bunch of different investments hoping that something will work and to justify the low return you receive. Then they say that you were safe because you had your money spread out among many different investments.

What this really means is that they don't know how to buy low and sell high, refuse to learn more about financial markets or spend the time to educate you, the client, about how investing works and that you shouldn't be so afraid if your investments drop 10 to 15 percent in the short term.

For example, many pension plans and endowments for large schools use asset allocation. Harvard is known for its asset allocation model, so let me share how it manages the largest university endowment of $32.7 billion.

In 2008, only 45 percent was in equities and only 12 percent was in domestic equities; 33 percent was in international emerging markets and private equities. Twenty-six percent was in what's known as real assets such as commodities, natural resources and real estate. Harvard also had the balance in hedge funds and fixed income, also known as bonds, which includes foreign, domestic and high yield-bonds as well.

Fast forward to 2013, after the U.S. stock market had one of its best returns on record. One would think that these smart people from Harvard would have seen the value of U.S. companies and increased its exposure to such great investments. Sorry to say, no. Actually, the exposure to U.S. equities fell to 11 percent with a small increase in emerging market stocks and an increase to 16 percent in private equity.

Total equity investments went from 45 percent to only 49 percent, total real assets went from 26 percent down to 25 percent, hedge funds dropped by 3 percent to 15 percent and fixed income fell to 11 percent from 16 percent. So how did this great asset allocation plan perform? It returned 11.3 percent for the year ending June 2013 -- roughly half the return of the Standard and Poor's 500 Index return of 20.6 percent. But the five-year picture looks even worse, averaging 1.7 percent while the S&P 500 returned 7.0 percent.

If that is not enough to get you thinking, let me tell you about an article on Warren Buffett that was in Fortune magazine last September. Mr. Buffet wrote a letter to a company that he was on the board of back in 1975 saying that it was ignoring its pension plan, which was only earning 4 percent and being managed in the traditional fashion of asset allocation by one of the big pension companies at the time.

He wrote that if a company had $100 million invested in its engine division earning 12 percent by managerial zeal and ingenuity, why in the world would one be satisfied with a 4 percent return in the pension plan?

The point is that companies will invest in other companies for the business and expect a good return, so why, when it comes to investing, do investors or pension plans and endowments feel the need to protect the downside in the short term and sacrifice a far better long-term return?

I will tell you why: Emotion and lack of education.

People fear the unknown and make bad decisions when they don't understand that the best long-term investments are fundamentally strong companies (stocks) that are priced at good valuations and have pristine financial statements. And if you don't understand how to read financial statements, learn or hire someone to manage your money who knows how to read them.

If your adviser doesn't know how to read them, then find another adviser who knows how to make you money.

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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