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Intelligent Asset Allocation: Equip Your Portfolio to Survive and Thrive

The American billionaire J. Paul Getty once remarked that his formula for success was to “rise early, work hard, strike oil.”

a bag of money and several different asset classes in the form of blocks balancing on a scale

Source: William Potter/Shutterstock

But if you don’t strike oil, you need other ways to accumulate — and protect — your wealth.

Enter the concept of Intelligent Asset Allocation.

With it, you’ll decide how much capital to place in specific asset classes, like stocks, bonds, cash, precious metals and real estate.

The goal here is to create an “all-weather” portfolio that thrives during up and down markets.

Intelligent Asset Allocation is the nuts and bolts behind what most investors call “diversification.”

To some, diversification seems defeatist or lazy — like a kind of surrender.

And that’s exactly correct!

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Diversification is a surrender to the unknown. We diversify our portfolios because we cannot know exactly what the future holds.

Intelligent Asset Allocation functions like shock absorbers on a car. It makes the ride a lot smoother as you go from Point A to Point B.

“Now wait a minute, Eric,” you may be saying. “Don’t stocks perform better than any other major asset class over time?”

You’re right. That’s a fact. But it’s a misleading fact.

The stock market’s strong performance “over time” includes many gut-wrenching sell-offs and bear markets that create large mark-to-market losses… and, therefore, large bouts of fear and anxiety.

During the last 90 years, the stock market has produced an average annualized return of roughly 10%. That’s an impressive number. But those 90 years of strong average yearly gains included 11 bear markets in which the stock market fell more than 25%.

To gain additional perspective, let’s look at two hypothetical investors, circa 2007…

How to Avoid Wipeouts

Investor A is enthralled by the high-flying stock market and has put 100% of his assets in stocks. Investor B is more cautious. Just 50% of her assets are in stocks. The other 50% are in 10-year U.S. Treasury securities.

Investor A’s 100% stock allocation would have lost 37% of its value in 2008. Meanwhile, Investor B’s diversified portfolio would have produced a return close to zero — no gain, but no loss.

That’s because the gains from her Treasury allocation would have offset the large losses from her stock allocation.

Clearly, Investor B’s portfolio would have survived 2008 much better than Investor A’s. So far, so good.

But on the flip side, during a period of strongly rising stock prices, Investor B’s cautious approach would not perform as well as Investor A’s.

The Secret Behind the Widening Wealth Gap

That’s why many investors resist Intelligent Asset Allocation. They simply cannot stand the thought of “missing out” when stocks are flying high.

But the reality is that “missing out” is far less painful and financially destructive than “wiping out.”

Consider the catastrophic losses suffered in the early 2000s by some employees of Enron, who were encouraged to put most or even all of their 401(k)-retirement savings in Enron stock.

These folks did not use Intelligent Asset Allocation — and they paid a heavy price.

In the late 1990s, Wall Street considered Enron to be one of the world’s most innovative companies. Its executives were the superstars of Corporate America, and the Houston-based company received endless accolades.

  • In early 2001, all 15 Wall Street analysts who followed the stock rated Enron a “buy.” Meanwhile, the financial press also was heaping praise on the stock.
  • In August 2001, the Houston Chronicle lauded Enron as “a company with innovative people who have shown they can turn ideas into profitable businesses.”
  • In its September 2001 issue, Red Herring magazine insisted: “Forget about Microsoft. America’s most successful, revered, feared — and even hated — company is no longer a band of millionaire geeks from Redmond, Washington, but a cabal of cowboy/traders from Houston: Enron.”

Less than three months after the Red Herring‘s glowing endorsement, Enron filed for bankruptcy. As its stock plummeted to zero, the “cabal of cowboy/traders” gained infamy as some of the biggest fraudsters in American history.

The employees who bet everything on Enron were completely wiped out. When the company went under, they didn’t just lose their jobs. They lost their savings, too.

It was easy to be taken in by all the hype surrounding Enron — and to be seduced by the stock’s seemingly limitless promise and potential. It was easy to believe that Wall Street and the financial media knew what they were talking about.

Could this be behind the next wave of millionaires?

Enron seemed like a sure thing, especially to the folks who worked for this high-flying success story. That’s why so many employees placed all of their retirement savings in Enron stock. Their asset allocation was 100% Enron.

Not good.

If you devote a huge portion of your wealth to a single asset class — whether it’s stocks, bonds, oil, gold, real estate or whatever — you are financially fragile. You expose yourself to serious harm.

But you don’t have to do that.

With Intelligent Asset Allocation, you can equip your portfolio to survive and thrive.

On Saturday, I’ll be back with an Intelligent Asset Allocation tactic you can apply right now… and tips on how to place yourself on the right side of the ever-widening American wealth gap.


Eric Fry

P.S. 56 new billionaires were created in the U.S. in 2020 — during one of the worst economic downturns we’ve ever seen. And I’ve uncovered how the wealthy elite continue to grow their income while others live paycheck to paycheck. I share my findings — as well as one of my stock picks for this year — in this video. Click here to learn more.

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.

Article printed from InvestorPlace Media, https://investorplace.com/smartmoney/2022/01/intelligent-asset-allocation-equip-your-portfolio-to-survive-and-thrive/.

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