AUGUST 2007

I don’t like being redundant: but I think it is a good time for a little reminder regarding some actions that need to be taking place in one’s portfolio in order to be successful.

ASSET ALLOCATION

Based on the ground-breaking 1986 study by Brinson, Hood and Beebower, more than 93% of long-term institutional portfolio returns derived from the which asset class you were in; the other 7% came from selection and timing. The media and the culture do not find this newsworthy or exciting. They would rather have you focusing on what they are reporting. Asset allocation is and will always be the dominant variable in portfolio returns.

DIVERSIFICATION

Second only to asset allocation, diversification is the next critical portfolio behavior. Getting diversified and staying diversified keeps you from betting the ranch on a fad at a market top and from hiding out in cash at a bottom. Nick Murray describes it as, “The personification, in our world, of Aesop’s tortoise: it’s slow, it’s steady…and it always wins the race. Diversification is the conscious decision never to be able to make a killing, in return for the priceless blessing of never getting killed.”

REBALANCING

Sometimes your portfolio gets lopsidedly exposed to something – usually because that something has gone up spectacularly, and not much else has. The typical investor media-driven response is to sell out of the “laggards” and chase the dream. “Kind of like electing to be the hare in Aesop’s fable.” Most investors are unconsciously speculators instead of investors: they chase price trends instead of seeking neglected values. (Speculator not only doesn’t know that price and value are inversely related; he will get really mad if you try to tell him). Rebalancing takes some profits off the line and redeploys them in undervalued areas.