Making Cents of Wall Street

Did I spell that wrong? Nope everyone wants cents, millions of them from Wall Street. Wall Street lacks the neon and diadems of electric Norman Mailer ascribes to Las Vegas. Wall Street does offer risk and allure.

One distinction separates the two cities; what happens on Wall Street does not stay on Wall Street. Wall Street tells all (most of the time). This is the reason we describe our markets as efficient. News travels faster than gossip at the local hairdresser’s shop.

Investors hear what happened, and wonder how to react. Sell or buy? Large cap or small cap? Foreign or domestic? Stocks or bonds? Market news triggers investment hopes or kills investment expectations.

What strikes me as odd is the frequent changes investors must make to keep up. most of us have instinctive-change disease; we don’t like change. when someone suggests change, we feel suspicious. better to leave a portfolio as it is than to head off toward the unknown. Maintaining some diversification (stocks and bonds) with a percentage (weighting) in bonds and the balance in stocks seems consoling and reasonable.

Investment advisors don’t like recommending change either. why risk the rapport between advisor and client by suggesting change? Often, the decisions made between advisor and client come from mirrored views. I am conservative; my client is conservative. I am aggressive; my client is aggressive. Does client/advisor rapport serve investment decisions effectively? Like-minds matter when both challenge their safe-havens.

Investment firms offer straightforward assessment questionnaires with scoring to make the asset allocation decision easy. too often the recommended investments reflect subjective views about marketing and people. I asked an executive of a major investment firm, How come your firm has so many asset allocation models? his reply, Marketing.This is what our clients want from us, choices.

Asset allocation is not about choice, and asset allocation is more than keeping your eggs out of one basket. Asset allocation ought, in my opinion, to recognize and embrace multiple asset classes structured to increase return while minimizing risk. we chose asset allocation and diversification as the themes because these are the cornerstones of modern portfolio theory, which is based on the notion that investors want to maximize returns and minimize risk in their portfolios (Wealth Management Report: Asset Allocation and Diversification Published: June 17, 2004 in Knowledge@Wharton).

Too often, investors, based on investment questionnaires, choose investments that are too conservative. I can presume rightly that a conservative portfolio eliminates more asset classes than it includes. An aggressive portfolio includes more investment choices than it excludes. too much choice makes some investors nervous. KISS works wonders (keep it simple for me). But world markets are neither simple, nor predictable.

The greater number of asset classes included in a portfolio, the more likely the investment return will remain stable over-time. most of us want consistent returns from our portfolios so we can reach and maintain investment goals. Just keep the portfolio growing, or the income flowing. I don’t want my portfolio to force me to change my lifestyle.

The greater number of asset classes included in a portfolio, the more likely the investment returns will remain stable. when One asset is down, another should be up. Investors always look for a place to invest. as long as global markets function, at least one global-asset class will be attractive. Will your investment choices exclude or include that asset?

Asset allocation is more than keeping your eggs out of one basket. Asset allocation recognizes and embraces multiple asset classes structured to manage returns while minimizing risk or volatility.

Making Cents of Wall Street

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