Why Setting an Asset Allocation Policy Is a Bad Idea

Jahnke, William
February 1999
Journal of Financial Planning;Feb1999, Vol. 12 Issue 2, p26
Academic Journal
This article deals with the investment policy of financial planners toward asset allocation. The sharp 20 percent decline in the stock market in the summer of 1998 raised questions regarding the wisdom of stocking with an asset allocation policy that fixes asset class weights. Some planners advised their clients to review their risk tolerance as a way to justify lowering exposure to the stock market. One way to think about the investment process is to define it in terms of investment policy, strategy and selection. Investment policy includes a definition of client goals and any constraints which the client or advisor wishes to set on investment strategy and selection. If asset-class expected returns and risk do not change, then investment strategy should change only if client circumstances change. In a world where expected returns do not change, engaging in market timing does not make sense once the optimal asset allocation solution has been determined. Market timing is not only unnecessary, it is sub-optimal. The determinations of investment strategy and selection should be considered within the context of clients achieving their financial goals. Those planners who disconnect the investment management process from the financial planning process do a disservice to their clients.


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