Don't Overlook Asset Allocation

By Sirt, Ronald A. | Independent Banker, November 2007 | Go to article overview
Save to active project

Don't Overlook Asset Allocation


Sirt, Ronald A., Independent Banker


One interesting theme I discovered in my recent dealings with bank owners and senior executives is what I call the barbell approach to investing. Most clients invest the bulk of their assets in their own bank stock and round out their portfolio with investments in other banks. In addition, these clients tend to own a fair amount of real estate. Without exploring the actual financial planning process, I would like to focus on asset allocation within the equity component of the portfolio.

Equities are broadly categorized in two ways: market capitalization and investment style.

In reviewing portfolios, most bank owners and senior executives invest a large portion of their portfolio in their own bank's stock. These clients instinctively complement those holdings with large cap equity money managers or large cap equities.

According to Ibbotson Associates, 92 percent of a portfolio's investment return is determined by the strategic allocation. As a result, spend a fair amount of time concentrating on this area when reviewing and constructing portfolios.

Different sectors and investment categories respond to economic and market changes in various ways. For example, the market was extremely volatile during the past quarter ending Sept. 30th, which resulted in the following returns for the following sectors: according to the Oct. 1 edition of The Wall Street Journal: non-ferrous metals (19.9 percent) consumer electronics (18.7 percent) heavy construction (18.6 percent) and gambling (16.2 percent). These sectors continued to outperform the more defensive sectors such as durable household products (-9.8 percent) and mortgage finance (-16.4 percent). Collectively, growth sectors outperformed value sectors regardless of capitalization with Mid Cap Growth leading the way at 14.6 percent year-to-date.

At any time different sectors and asset classes will outperform or under perform various benchmarks. See the periodical table (page 100). Large cap growth stocks may outperform emerging markets depending on the current market environment, and vice versa. Regardless, sophisticated planning requires a focus on asset allocation with tactical sector shifts and regular rebalancing.

Having a concentration of securities in two or three asset classes exposes a portfolio to what many people consider an unacceptable amount of volatility. Volatility is the rate at which the price of a security changes over a certain time horizon, and is typically measured by standard deviation.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Don't Overlook Asset Allocation
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?