Investor’s column: Here’s why now is the time to return to a normal path of investing

For the past several years, investors who took the traditional path of investing have either lost money or at the least had a very minimal return. Those who deviated from the traditional path prospered.

Typically, when an investor begins a relationship with an advisor, it almost always includes the understanding of the clients’ risk tolerances and resources. This is usually accomplished with a questionnaire.

I have seen these questionnaires run for dozens of pages or 10 questions on one page. I like the 10 questions on one page.

Either way, the outcome is the same.

We produce a pie chart that suggests, based on your answers, what your asset allocation should be. This is what portion should be allotted between stocks, bonds and cash (and their equivalents).

Asset allocation is one of the top drivers of your portfolio performance. It is more important than individual security selection or market timing. I repeat, it is very important to have the correct allocation to achieve your goals.

Experts have suggested that more than 80 percent of your portfolio’s performance is based on how you allocate between stocks, bonds and cash.

But, it is a tool, and in normal situations sticking to that allocation, or near to it, is good.

Most advisors will do their best to put you in the most conservative portfolio available to meet your income needs. (Most of this discussion is directed toward retirees rather than younger investors).

This is where an experienced advisor can help.

An experienced advisor should be able to understand that we have been in a different world the past several years. Following a traditional asset allocation would have led to no or poor performance.

Here’s why. A traditional allocation for someone near or in retirement may be something like this: 40 percent stocks, 50 percent bonds, 10 percent cash.

One rule of thumb is to take one’s age and subtract it from 100 to get your allocation. Basically, your age should be in bonds and the difference in stocks. If using the figures in the example, 60 percent of your assets would have been in low yielding bonds/cash with longer maturities in order to capture some yield.

For the average investor, such as the majority of the clients I work with, this strategy would not have worked. In addition to not enough income being generated to meet their living expenses as well as the distinct possibility of losing principal value, the traditional strategy would have been unsuccessful.

I, like many of my colleagues, were forced to almost flip the traditional allocation model over. The smart — and only — move available was to invest more of our allocation into large quality stocks versus bonds or cash.

This strategy has been successful even though the client needed to assume more risk than with the traditional allocation.

With the economy moving back to a more normal situation, interest rates are beginning to rise. Wages are starting to increase.

The Sept. 7 jobs report appears to finally include the long-anticipated acceleration in wage growth. Of particular note to me was that the earnings for people that never finished high school are up more than 7.6 percent in the past year.

Since wages make up a large portion of inflation, interest rates will increase as wages rise. All signs point to higher interest rates. As interest rates increase, they put continuing pressure on stocks for several reasons.

It signals to me that it is time to begin returning to the “normal” asset allocation model. This fact, along with the stock market at all-time highs, means it’s time to take some out of stocks and put into bonds/cash type of investments.

Sooner or later, we will have a market correction. Historically the longer between corrections, the more dramatic the correction.

Certificates of deposit are back in vogue. Their rates are becoming useful. They are insured by the FDIC. They can help to make a great bridge to a more traditional asset allocation.

I would suggest the prudent investor reading this may want to take a percentage of their stock exposure and reallocate to short term CD’s. I particularly like the 90-day CD’s. I am seeing them between 1.5 percent and almost 2 percent for that maturity. That’s subject to change, of course.

As the Feds continue to raise interest rates, these CD’s upon maturity can be rolled over to take advantage of the increasing interest rates.

If you implement a monthly plan to review and slowly move stock assets each month to short term CD’s, you can begin moving back to a more traditional — and recommended — asset allocation.

You would be decreasing stock risk while riding the increase up in interest rates with little risk as well. Asset allocation is extremely important. Things are getting back to normal. It’s time to get your allocation back to normal (for you) as well.

Michael T. Doll, an investment adviser with the Longboat Key Financial Group, can be reached at 941-896-2473 or michaeltdoll@longboatkeyfinancial.com.