Asset Allocation or Strongest Assets - YouTube

Asset allocation. Buy a well-diversified  portfolio. Buy and hold. These are all things  

you've probably heard in your investment history.  You've probably also heard if you've been through  

a tough patch in the markets, hang in there,  it'll come back. So Radon and I today, we're  

going to break down for you what asset allocation  really is, and also how we do things that's a  

little bit different than what asset allocation  is. So, we've got a great episode for you today.

We hope this is beneficial to you just to  understand some of the terminologies that  

you might hear when it comes to investing.  We feel that this will add some value to your  

decision-making process. By the way, as we talk  through this episode, if you think you'd like to  

learn a little bit more about what we do and  how that works, please go visit our website,  

which is pomwealth.net. The best place to  go on the website, I believe, is the blog  

page. On there, we have a multiple of articles,  but on the right-hand side, if you're thinking,  

"I want to understand this a little bit more," you  can get for free, we don't charge anything for it,  

a complimentary master class called Three Keys  to Secure Your Retirement. It's completely free.  

The first part of that, we actually talk a lot  more detail about what we're doing now, and we can  

use visuals that we can't use on  a podcast. So go check that out.

And by the way, if you feel that this show is  worthy of it, please give us a review. We love  

the written reviews and a five star rating. Those  are all very nice. But we are financial advisors.  

And before we can get into this, we do have to  do a disclosure. And Merce is our disclosure guy.

That's right. The information contained in this  podcast is intended to provide general information  

only and not to be considered individualized  advice. Different types of investments,  

carry different types of risks. As always,  please contact your financial professional  

for advice appropriate to your specific  situation. Hope you enjoy the show.

Welcome everybody to our retirement in action.  We do this every Wednesday. I will tell you,  

for me, Merce and I, I think we enjoy this one  because we get to hit topics that are coming up  

in our practice and from our clients. And from  those that are not clients and are checking  

us out, or they're maybe looking at rather  multiple advisors, trying to make a decision  

on who they would work with, who's  going to fit them and their personality.

And today on this particular episode,  

we're going to talk a little bit about money  management. And we really have broken it down  

into two major categories. One of those is  asset allocation. We're going to explain  

exactly what that means. And then the other one is  find the strongest assets. What are the strongest  

assets that you can be in? And how do you do  that? So we'll talk about those two strategies.

I do want to do a little bit of a setup  though. And the setup is this, I believe,  

and whenever somebody is ever looking at  us. And that conversation usually goes with,  

"Hey, I just want you to know I'm  talking to a couple of advisors."  

I go, "Fantastic." And by the way, this is  the way we believe, we firmly believe this.  

You should work with an advisor, with a  financial planner, whatever you want to  

call them. You should work with somebody who  their personality and your personality match.

And so Merce and I have our personality, we have  our thinking, we have our process. We do what we  

do and we don't alter that to try to match  somebody else. We just do what we do. And if  

somebody goes, "I love what you guys do." Well,  then that's probably a good fit for us and them  

together. But if they go, "You know what, I really  want it to be this way. Can you guys do that?"  

Merce and I very quickly will say, "Sorry,  we can't do that. Maybe we can refer you to  

somebody else who does that," because we're just  not good at that. We're not good at that process.

So we're going to talk a little bit about our  process today. We're going to talk a little  

bit about our belief system today. And you're  either going to say, "Hey, that makes a lot of  

sense," or "That's ridiculous." One of the  two. That's okay. So bear with us on this,  

but we want to talk a little bit about  this so we understand definitions.

So first of all, we want to understand when  you ever hear this terminology from an advisor,  

what do they mean when they say asset allocation?  "You know what we need to do? We need to look at  

your risk tolerance, Mr. and Mrs. Smith.  And then based on your risk tolerance,  

we're going to build for you an asset  allocation." That's a very common sentence.

So Merce, could you explain  what an asset allocation  

means? And then we'll talk a little  bit about how maybe an asset allocation  

would be adjusted based on your risk  tolerance. But first of all, what is it?

Yeah. Yeah. So asset allocation is by far the  most common way of investing. And I think it's the  

most common for a couple of different reasons.  It's relatively easy to do. And then there's  

hardly any maintenance to it. So asset allocation  from a very high level is you may have heard buy  

and hold or buy a well-diversified portfolio.  That's essentially what asset allocation is.

So for example, let's take a bucket of money  and let's put it into the stock market,  

but let's put it into different sections of the  stock market. So it may be large cap stocks like  

your Apples, your Amazons, your Googles. Maybe  mid cap stocks, small cap stocks. So a sliver  

of your money goes towards each section of  these. And then you've got your sectors like  

being involved in energy, being involved in  technology, being involved in healthcare and  

financials. So you buy up a little piece of  all of these. And then also the bond side,  

the fixed income side. So  you buy up some of that too.

And all of a sudden, you've got this ... if you  can visualize a pie. And you've got a bunch of  

different slivers in different places of the  market. That's essentially what asset allocation  

is. You're buying all over the place. And the  idea is that if you buy in enough different places  

and you hold it for the longterm and  we're talking five, 10, 15, 20 years,  

you hold it for the long-term, then the idea  here is that overall, the market is going to  

go up. And those pieces that you own are also  going to go up at different points in time.

So take for example, last year in 2020.  2020 was a messy year, but overall large cap  

did very well. And then we had small cap and mid  cap that didn't do as well. They were affected.  

And so large cap held up your asset allocation.  It made the overall portfolio looked like it  

did okay. But you had those slivers  that didn't do so well. But overall,  

if you're buying that well-diversified  portfolio, you're holding onto it, you're  

going to have things that do well, you're going  to have things that do bad. And the overall is  

you're going to do generally okay if you're  willing to sit in there for the longterm, sit  

in there for five, 10, 15, 20 years. And a lot of  times that's really the only option that you have.

So go to your first job and  you start investing in a 401k.  

A lot of times you don't know what to do, and  you just start picking different investments.  

There's a lot of investments  that you're probably familiar  

that are named kind of like target date funds. So  let's say you plan on retiring in 2030 or 2050,  

they're going to create an asset allocation  based off of how much longer you have left  

to work. And that asset allocation is going to  continue to adjust based off of your age. And so,  

it's one of those things when I said  earlier, when I said it's easy to set up.

Well, really what the advisor is doing in the  background is once you have that conversation with  

the advisor, once you pinpoint your risk tolerance  and it says, "Okay, here's where I belong."  

Well, then you buy into that or the advisor buys  into that for you. And then it's just a little  

bit of ongoing maintenance, which is essentially  rebalancing the account. Maybe it's quarterly,  

maybe it's once a year. And so there's very  little maintenance to it. So it's an easy way to  

set it and forget it. You've  probably heard that term as well.  

So that's a very high level as  to what asset allocation is.

Yeah. And I think the thing that you want to have  clear when you're thinking about asset allocation  

is sometimes we've had folks come into us  and they've said this, "Hey, you know what,  

I was with my advisor and I thought  I was in a conservative portfolio,  

but then came 2008 or even more recent March  2020 and the market, let's just use March 2020,  

dropped in that period 32%. And I felt like I was  in a conservative portfolio, but I was down 20%."

And the reality is, yes, your asset allocation ...  And by the way, you could deem that as a good job  

because you would say, "I experienced 20% down  when the stock market or the S&P was down 32.  

So you still were hedged against that. And  then the asset allocation argument would  

be is that if you stay invested, you'll come  back, which you would have came back in 2020.

The question is, can you stomach that negative  whatever that is? And that's a big topic about  

what Merce and I talk about with folks is what  is that downside number? One of the processes  

we have when we talk about risk tolerance is  getting your downside number. We want to know  

at what point would you say, "I can't handle  that. I can't handle it." And we usually do it  

on a dollar number. We take a million dollars  and say, "Hey, 20%?" Ah, 20% doesn't sound  

that bad until we say 200,000. And then they  go, "Uh-uh, I do not want to lose 200,000."

So asset allocation, you have to figure out  what is your downside exposure. And Merce and I  

have a little process that we can take a  portfolio through and we can look at what's  

called the draw down of that portfolio.  We can put it into a model. And we say,  

"Hey, if you had this model for the last 15  years, 20 years, here would have been your  

max draw downs." And we can take your current  portfolio and do that. Take those holdings,  

if you're in an asset allocation buy  and hold strategy. And we can tell you  

what your what we call drawdown, the max you  would have lost. So if you ever want to see that,  

let us know, we can show it to you. We just  need to know what your portfolio is made up of.

Now, we've dealt with asset allocation. And I  think the biggest thing I want you to get out  

of that is you have to understand that asset  allocation means you do not sell even if the  

market is crashing. If you have a pandemic,  you do not sell. If the market is having a  

financial crisis, like in 2008, you do not sell.  Because if you sell, you defeat the purpose of  

an asset allocation. And if you have an advisor,  they're going to always tell you to hang in there.

All right, let's talk about this  other side, the strongest assets.  

Now, the strongest assets is a completely  different mentality that says, "Hey,  

I do want to sell whenever those assets are no  longer strong." So Merce, could you just give  

us a nice overview of a little bit of what we  do when we're trying to build around this idea  

of the strongest assets and what that would  look like as compared to an asset allocation?

Yeah. Yeah. So remember asset  allocation, pretty much we're saying,  

"Let's just buy as many little slivers of the  market as we can. Let's be well-diversified."  

So when we're saying that we want to be in the  strongest places, just picture the entire world  

of the stock market. So you've got equities,  your stocks, your companies. And you've got  

bonds, fixed income. And then you've got some  alternatives. And then also in the stock market,  

you've got cash options. So pictures them all  together. A lot of times, people don't ever  

look at them together. You say, "Well, got stocks  or I've got bonds, or I hold cash in the bank."  

We look at them all together. So picture them  all together and put them side by side in a  

race together. And so what we're doing is we're  saying, "Okay, in this race who is winning?"

Now, the majority of the time in the race, you're  going to have equities winning the race because  

equities typically are going to be the ones that  have growth to them. Bonds are kind of there for  

stability and to make a decent rate of return, but  they're really not there to really run away with  

returns. Equities are supposed to do that. So a  lot of times equities are going to be leading that  

race. But there have been times like 2001, 2002,  where the bonds have actually started to outpace  

the equities market. And so we look at it and  say, "Well, where is the strongest place to be?"

And then there's been times where you go to a  2008 scenario or a March of 2020 scenario, where  

you have equities that are pulling back in the  race. You also have bonds that are pulling back  

in the race. Cash hardly ever moves, but by  default, because it's not going backwards,  

it's now the leader in the race. And so that's  kind of a high-level way of looking at it,  

trying to paint a picture for you as to how we're  looking and seeing where is the best place to be.

So we're not saying we have to be an equities  at all given times. There's periods of times  

where we could take our 100% equity portfolio and  put it 100% into bonds, or 100% into cash like we  

did have to do in 2008, like we did have to do  in March of 2020 last year. So, go back to the  

equities. Now we've decided that equities are  the winner in the race. Now, let's dive down  

even further and say, "Okay, well in the world  of equities, stocks, who's leading that race?"  

And so we're not saying, "Well, we just need to  be in a piece of everything because equities are  

winning right now." We say, "Okay, let's find the  top performers in the equity side of the world."

And so to give you an example,  last year in 2020, large cap  

technology pretty much won the race. Even  with the blip that we had in 2020, large cap  

right around April took off. Technology right  around April took off. Why? Because those are  

the companies that were thriving amidst the  pandemic. And so we shifted our entire portfolios  

along that way. And we said, "There's no reason  to be in mid cap right now. There's no reason  

to be in small cap right now. So let's take  that out of the mix for this moment in time."

Now come January of 2021, couple months ago. All  of a sudden we started to see a little rotation.  

And now the leaders of the race in the equity  world are no longer large cap. And they're no  

longer technology. It's shifted to small cap and  mid cap. And so we made that change in January.  

And it's been very fruitful for us.  And so think about that as well.

Why is that working? Well, you've got the vaccine  hopes. You've got a change in leadership. You've  

got a bunch of different things that are going  on, where it looks like the world may go back to  

normal in 2021. So mid cap and small cap are  starting to make a little bit of a run. How  

long that run lasts, we have no idea. And we're  never going to forecast that. We're always just  

watching the numbers, always looking at the race  and trying to identify who the top leaders are.  

So that's a very high level, a nice little  analogy to give you an idea as to how that works.

And I will say that the vast majority of  folks who work with folks like Merce and I,  

their objective is like, "You know what? We  want to make a good rate of return. We just  

don't want to lose so much." And because of the  fact that we are actively managing the account  

and we're watching it every single  day, we're not trading every day,  

but we're watching it every day, and we are  managing those assets. And if things happen,  

it could be the middle of the month. If  things start to get bad, we will sell.

Now the argument against that would be,  "Yeah, but when do you get back in?"  

Again, we're measuring that. And Merce and I can't  do that by ourself. We spend a lot of money every  

year and we hire analysts that give us data  that tell us what the strongest assets are.

So if cash becomes dominant because equities are  falling and bonds are falling and we go to cash,  

that same data is going to tell us  when to get back in. That occurred  

in 2020. We got out whenever  the market was crashing,  

but we had to get back in. And I'll tell you,  the data said, "Get back in." Our heart said,  

"We don't want to get back in because it still  looks scary." But we had to listen to the numbers.  

And we got back in, and we actually did very,  very well for 2020 despite the fact that we took  

our clients through a scenario where they had  very minimal downside throughout that process.

So all we're trying to do here in this particular  conversation is helping you think through,  

what do you think your personality is? Do you  think you like the idea of this asset allocation  

buy and hold, keep the portfolio invested  all the time, "I'm not going to sell no  

matter what happens in the market. I'm okay with  understanding that the portfolio could be down 20,  

30, 40%, but I understand that it will maybe  come back over years, and I'm good with that."

Or do you say, "You know what, no. I would rather  have my assets observed and watched and protected  

because it's more important to me to make a  decent rate of return and minimize the downside.  

Because I've worked for decades to get this  money and now it's not about trying to get  

the biggest growth out there that I possibly  can get. It's saying I want a decent rate of  

return. I don't want to lose so much money."  If that's what you're saying, asset allocation  

allocation's probably not going to fit you.  But if you say, "Hey, I don't like this idea  

of selling and going to cash," well then active  management is probably not going to fit you.

So in our approach, we're attracting those people  that say, "Hey, I like you. I like what you do."  

Because if you came to us and said, "Guys, I want  to buy and hold, and I want you to manage it that  

way for me." Merce and I are going to say, "We  don't do that." Now, if a person comes in here  

with a stock that they love. And they say, "I  want to hold that stock. Please don't sell it."  

Well, we won't sell it. But that's on them if that  stock crashes. We don't charge anything for that.  

We don't make any money on that. We just say, "No,  we'll hold the stock. If it crashes, it crashes."

So we hope that this gives you a little bit  of an idea about this. If you've got more  

questions and you're trying to figure that out,  there's a couple of things you can do. One,  

you can go to our website, which is pomwealth.net.  I encourage you to go to the blog page. There's  

tons of articles, where there's an article on  this particular episode that you're listening to,  

as well as on the right hand side, there's a  thing you can listen to. It's a video Merce  

and I created called Three Keys to Secure Your  Retirement. It is a video that takes you through  

the process of thinking through retirement. And  in the entire first section, it talks about how  

we manage money in that video. So if you'd  like to hear that, please go check it out.  

We hope this has been beneficial. Thank  you so much for spending your Wednesday  

with us here and listening to the podcast.  We look forward to talking to you next week.