Mary Pilon wrote Ditching Your Investment Strategy last week on Wall Street Journal Blogs, reviewing an article written in the WSJ by her collleague Tom Lauricella. She reviews the idea that asset allocation is supposed to help investors avoid severe loss by spreading the risk around in their portfolios to various asset classes…but that this standard tenet of portfolio management didn’t help big funds this past year, and that investors are seeking somewhat more “stable” investments like index funds.
We should stop telling 401(k) and IRA savers to diversify their assets, and have just two investing mediums for retirement savers: index funds and self-directed accounts:
- With index funds, those who don’t want to or have no knowledge to decide on asset allocation will just put their monthly or biweekly monies into a standard fund which is known to go up and down with the tides of the times.
- With self-directed accounts, waivers are signed saying the investor knows what he/she is doing, and the sky’s the limit (within bounds – stocks, bonds, mutual funds, but no margin, no futures, options or other derivatives).
If you give people asset allocation, they’ll do what anyone might do: they’ll reallocate after the market tanks…and then leave it in a “safe” setting right through the next bull market. We should insure against human nature by limiting the options…after all, do we expect (and attempt to direct) consumers to pick investments that health or life insurance funds are invested in? Not likely.
..TS.
