A few months after the Great Recession a writer for a national magazine asked a simple question: “Did asset allocation models let down the individual investor?” I don’t think they did because conservative models lost less money than aggressive ones during the meltdown. In other words, the models performed as expected.

Asset allocation models are designed to perform based on their underlying investments. They won’t guarantee your assets against market losses, but they will perform in line with their benchmarks. In a rising market aggressive models will outperform conservative ones. The opposite occurs when markets are falling.

During a market rout you may find solace by selling your investments and moving your money to cash. In the short term, it will provide safety and comfort. However, over time, holding cash is a losing proposition because your returns will be negative after you factor in taxes and inflation.

A better idea is to align a model to your risk tolerance and financial goals. If your time horizon is longer than five years, a growth-oriented model may be more fitting than an all cash strategy. You’re likely to stay invested through a market cycle if your portfolio is aligned to your beliefs giving you an opportunity to capture the returns from the long-term trend of the stock market.

How do you know which model is suitable for your situation? There are companies that provide risk tolerance software to help determine the right model for you and your family. Riskalyze and Finametrica are two firms that work with advisors to help clients determine which model is appropriate. In addition to their algorithms, a financial plan and client conversations will complete the overall asset allocation and model process.

Why should you use a model for your investment portfolio? It will give you exposure to sectors you might not have considered if you only buy individual stocks or bonds. Your model may own a dozen different mutual funds covering several asset classes and thousands of securities. You’ll gain access to international markets, real estate holdings and high yield bonds, to name a few. In addition, it’s more efficient to rebalance a globally diversified portfolio of mutual funds allowing you to keep your risk level in check.

As we approach the end of the year, it’s a good time to review your investment strategy and your holdings. Are your accounts aligned to your risk level? Are you aware of the risk in your portfolio? A portfolio review, risk analysis, fee audit, and financial plan can help you answer these important questions – and many more!

Life is a fashion show; the world is your runway.” ~ Marc Jacobs


Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.