Why Fisher Investments Spain emphasizes that asset allocation is not synonymous with diversification


One claim that Fisher Investments Spain is often found in the financial analysts we follow is that a truly diversified portfolio combines stocks, fixed income, gold, other commodities, cash, real estate and maybe cryptocurrency, so if one asset goes down in value, the others can compensate or cushion the damage. In our opinion, this is a fundamental error: to confuse diversification and asset allocation.

Asset allocation is the combination of stocks, fixed income securities and other securities in a portfolio. In Fisher Investments Spain’s view, asset allocation for any investor should be based on their long-term goals, their time horizon (the time it takes their money to reach those goals), their investment needs. liquidity, risk tolerance and others. personal considerations. While each person has different needs, of course, we believe that in general it is prudent to make long-term changes in asset allocation only when one of these factors changes to the point that the Achieving long-term goals requires a different combination of risk and expected returns.

For example, we think that a young investor who is decades away from retirement, who seeks long-term growth, who does not plan to withdraw funds for a short-term reason, and who does not make regular cash withdrawals, is likely to benefit better from ” a high income allocation variable (as long as it meets your risk tolerance). With such a long time horizon, you probably have plenty of time to see long-term market returns, even if you run into bear markets along the way, as you don’t have to worry about withdrawing funds after a crash.1. (A bear market is a deep and prolonged decline equal to or greater than 20% caused by an identifiable root cause.)

Instead of, a retiree who pays regular distributions could benefit from a strategy of equities and fixed income securities (also depending on your risk tolerance and other investment objectives). While the historical performance of returns indicates that this allocation would likely sacrifice some long-term returns, it is also likely to reduce short-term volatility and reduce the risk of having to withdraw money after a stock market crash.2. In our opinion, someone who plans to use all of their savings to fund a down payment on a home over the next two years would do well to invest in cash or similar securities to prevent a drop in stocks or securities. Fixed income does not prevent it from reaching your short term goal.

Many commentators who argue that diversified portfolios should hold a wider range of assets would likely judge these investors to be insufficiently diversified and to take too high a level of risk. They might be wondering things like: Where are the gold and commodities to hedge against inflation? What about real estate? What about cryptocurrencies? In this we see a problem and an error. From our perspective, the problem is that mixing all these disparate assets just to diversify could lead to an asset allocation that is not suited to the personal circumstances of the investor. The mistake, in our opinion, is that these categories are exposed to risks and opportunities that cannot be obtained with stocks and bonds.

To see how it works, we think it is useful to examine the raw materials. However, our studies show that gold and other commodities are not a reliable hedge against inflation, as many financial analysts we follow claim. Yes, general economic theory holds that commodity prices should rise with inflation in the very long run, but our studies show that they can fall (and this is indeed the case when inflation rates are above. the average) . But other than that, investors can easily gain exposure to the commodities market through equities through the energy and materials sectors. Profits of oil companies tend to rise and fall with oil prices, according to our studies. Metals and mining companies (which are part of the materials industry) are also sensitive to copper, nickel, iron ore, and other metals, generally based on our findings.. We have also found that stocks of gold mining companies tend to benefit when gold prices rise. By seeking exposure through stocks, rather than commodity futures or physical ownership of precious and industrial metals, an investor technically owns a share of the profits generated by those commodities. You can research the companies that are best positioned to profit from it.

We believe youA similar logic applies to all other asset classes assumed to be necessary in a diversified portfolio. In the case of real estate, listed real estate investment funds (REITs) are included in general stock market indices such as the MSCI World Index. REITs trade like stocks and are essentially stocks, providing easy and liquid exposure. (Our views do not apply to private or unlisted REITs, which we believe lead to multiple problems.) We believe cryptocurrencies are a fad and a mass phenomenon, but if you don’t Don’t agree and want to expose yourself to it, there are a number of bitcoin-related companies that our analysis shows primarily trade based on cryptocurrency prices. . Owning shares in related companies instead of cryptocurrencies circumvents the drawbacks of direct ownership (e.g. the relative lack of security in some cryptocurrency markets, lack of resources in the event of theft, potentially taxing complex, etc.).

In the opinion of Fisher Investments Spain, truly diversified portfolios are those that diversify within selected asset classes. For the fixed income portion of your portfolio, this could mean having a combination of government and corporate securities or a range of maturities (the time the principal of the debt has until the issuer undertakes to repay it in full), so that you diversify these instruments with respect to factors such as interest rates and others. On the equity side, we believe that diversifying means owning a range of sectors and industries, and preferably investing globally. In our view, this also means ensuring that a position in a single company is not significantly greater than the weight applied in a broad index such as the MSCI World. Owning only one or two companies in some of the smaller industries may be enough, but for the larger ones, such as tech, industry, finance and the rest, we think it’s best to own more than one.

When diversification and asset allocation are well separated, we believe it is actually easier to build diversified portfolios.. Rather than adding marginal and hard-to-access asset classes (some of which are less liquid and more volatile, according to our studies), you can tailor a portfolio to your unique situation and fill it with easy-to-follow actions, buy and sell. . Therefore, we believe that investors should not confuse asset allocation with diversified portfolios. All you have to do is determine which combination of stocks, bonds and other securities is best for you – the one whose expected return and short-term volatility best meets your goals, needs and needs. your risk tolerance – and later. diversify it within the framework of these guidelines.

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