Breaking Down a Retirement Portfolio

Asset allocation

Your Feb.19, 2009 portfolio allocation maintains allocation

portorns and ratios that have existed for decades. This allocation needed to be significantly altered from the past beginning NLT Oct. 2007. The over weight in lg. Cap. domestic stks. was over due for a decrease by that time, and economic forecasts suggested a program of progressive per centage changes as news reports indicated negative new data. The absense of any cash postion now suggests that investors would have remained in the stk. Mkt.'s since that time until now.

The rally that ended in Mar. 2008 did not reflect the economic conditions. The likelyhood of a recession that would lead to lower interest rates which would normally be a brake to

business decline, did not have that affect. The association of the coming recession with a decrease in the consumer spending and a credit worthiness decline "should" have been an additional indicator of a decrease in allocation in stks. The election results, predictable by the end of Aug., along with further decline in economic indicators, should have made the post November market decline predictable. I raise the question as to why investment managers did not move out of the mkt. and into cash and short term debt a year ago.

The truth of the matter is that managers could not move out of stocks even when indicators suggested this course of action.

This is due to a lack of leadership and initiative to take large scale contrary market positions. Additionally, where would a manager move, collectively, trillions of dollars in equity's? Are mutual fund and investment (ex. pension and money contribution plans) manager's portfilio positions so inelastic to declining economic conditions that a large scale shift to cash, before the individual investor forces a sell off due to redemptions, would be a reasonable expectation for the investment holder? Why did the likes of American Funds, Fidelity Funds, and Vangurad Funds, to name a few, follow the markets down 25% to 50%-plus rather than lead their portfilio's out ahead of these losses? Is the distain for charging fees "to manage cash" a simple enough but true answer? Or is over coming of the ererta of the "60/40" allocation or similar formula' such as 100 minus age, which advises investor's to stick with the equity markets, so ingrained in our investment indoctrination that managers fear to abandon it themselves? Which is worse for the manager and the investor, hesitation to leave the equity markets in an orderly manor for fear of provoking redemptions or falling behind the markets as redemptions drain investments and individual stock selections decline in number and quality? Would a investor now or in the future not have greater confidence in a money manager who choose to exit the equity markets as indicators dictated, rather than stay with or move to a manager who "produced" a 35%-60% portfilio decline. What decisions that lead to a manager's result are not transparent enough to evaluate the relative difference between a manager who's portfilio is down 35% versus one who is down 55%.

My question is when a stock market (domestic and foreign) decline is so strongly indicated why are the 'professional' managers so lacking in re-allocation initiative? Hind sight shows that any investment manager who moved out of equities and low grade bonds starting before March, 2008 would be highly acclaimed for a significant cash position, say greater than 50%. This would be what I would call dollar cost averaging into cash rather than into different stocks.

Based upon the annual reports I have seen, there are no mutual funds, let alone family of mutual funds, that have significant cash positions. All of the equity funds have tremendous losses. How does an investor separate investment decisions by managers from redemption 'losses'? What will the capital gains reports for 2008 tell the investor? Did redemptions result in the sell off of the dogs? Would a report of significant capital gains in 2008 mean that the remaining portfilio contains a disportionate per centage of low performing prospects? How will the economy, both US and World, especially with the Stimulus Plan that has been selected, respond in such a way that would indictate the future prospects for the 60/40 allocation you recommend? Where is your 'beef'?

The generic 60/40 allocation has been around since I first entered the investment arena 40 years ago. I do not see where the allocation you suggest is advisably for the next several years, which drops it back into the previous track of a long term generic formula. This might 'fit' the young, new money contributor to retirement accounts if you first go to cash and dollars cost average from there. I do not see any justification (information) for a money purchase plan contribution of mine to go directly into your 60/40 allocation. It appears that virtually every equity sector is down year over year, so individual investment selection would be at a premium. This is a challenge for most investors. Even the mutual fund/plan managers would have the challenge of superior individual selections that could easily be lost to redemption demand should poor economic conditions continue (I have little regard for the impact of the Stimulus Plan) or if investor sentiment alone maintains the market averages and index's in a norrow range at todays levels.

How different the outlook for going to your 60/40 allocation would be if my present allocation was 50% cash, 25% equities (30% lg. cap, 35% mid. cap., both favoring high credit, divided paying stks., 35% sm. cap.- 50/50 US/For.); 25% debt (75% h i. grade gov't. and Corp., 25% hi. yld.- 60/40 US/For., split on taxable or tax exempt depending on type of money (Qual. or non-Qual.) and thus tax bracket. If in this position, I would dollar cost average BACK into a higher equity allocation but with a time frame of at least eigthteen months.

Sam W. Whitehill, CLU of TX @ Feb 19, 2009 19:25:47 PM