lattice wealth changing asset allocation

Changing asset allocation

Dave and I began working together in the early 1990s. From day one Dave was geared for growth. Over the years we comfortably doubled, even tripled the value of the IRA he wants to live off of once he retired. Two years are ago, Dave came to me, anticipating retirement in 2023. We wanted to move into a more balanced, stock and bond arrangement. However, we were not in a big hurry. How do we do that? 

If you have a bunch of mutual funds or even a separately managed account, the way you change asset allocations is by switching funds. In that switch you immediately go from an all-equity portfolio to one that is balanced. Perhaps you don’t move things all at once, but you are always forced to make a move. One big move. Likewise, in an SMA. Many annuities offer quarterly “asset allocation rebalances.” Most of the big bank trading software for individual portfolio managers have this effortless “reallocate” button. Hit one button: boom it is done. 

I think not. 

Another true story: Within our practice, in addition to managing portfolios, we have the occasional retirement plan. Generally, this is a situation where a client simply wants us to handle everything in their investment life, and they are a small business with a retirement plan. There are a range of retirement plan providers with platforms that handle the needs of small businesses quite elegantly. This client’s business had such a plan, and we were the “broker of record.” 

As this client was getting along in age, had a meaningful amount of net worth in the plan, and we had a strong market for a series of years, I suggested he change the allocation in his plan to something much more conservative. He took my advice. It wasn’t a good idea. The market continued up. (He had been using an S&P 500 index fund.) Two years later his account had crept up and his partner, who didn’t take my advice and kept his fully invested in the stock market, had meaningfully outperformed him. I looked pretty stupid.

Market sensitive asset allocation

We take an entirely different approach in the accounts we manage. It’s far more elegant than the experience of mutual fund and Separately Managed Account investors. 

Going back to Dave. I proposed an idea to him that we use regularly for those in life transition. If you look at the chapter titled “Risk Management” you will see how we raise cash in a weak market, we use modest and then gradually larger cash raises and—most important—buy higher quality names at low prices as they are offloaded by institutions. 

But if we are trying to move from an all-stock arrangement to one that is balanced like we are doing with Dave, we simply do not buy more stock in this scenario. Instead, we buy bonds. We transition from an all-equity account to a balanced account. Again, remember your Sharpe Ratios. This transition ought to make the account performance more predictable. 

This sounds simple, but it is a very elegant way to continue to be growth oriented in a rising market and then gradually, gradually, go from an all-stock account to one that is balanced. In a good stock market, it could take years! All the while, the account is increasing in size while we “let our winners run.”

Scroll to Top