Sep. 25–A Banc One adviser recommends portfolio diversity to state clients.
Many investors have learned the hard way that bulls are not always stronger than bears.
And regardless of which creature happens to be controlling the market, asset allocation is essential.
According to Bala Iyer, the importance of asset allocation was lost on many investors in the 1980s and 1990s as they became complacent and accustomed to watching their portfolios rise.
Previous bear markets were mild in comparison to the most recent downturn, when stocks dropped 40 percent in about two years, said Iyer, director of the quantitative research team at Banc One Investment Advisors Corp.
“I don’t think investors thought that this was possible, and therefore they significantly underestimated the risk of equities, and now they need asset allocation,” he said.
Iyer made stops Wednesday in Tulsa and Oklahoma City to discuss the importance of asset allocation with several of the banking group’s private clients.
In his position with Banc One, Iyer is responsible for strategic and tactical research on asset allocation — the process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose is to reduce risk by diversifying the portfolio.
“Even if an investor has a long-term horizon of 15 to 20 years, it’s still not clear which asset class will dominate over that time period,” Iyer said. “It could be small cap, large caps or international stocks. We don’t know. So you need to be diversified.”
Trying to time the market also is dubious and difficult, he said.
“The fact of the matter is that stocks tend to have these big jumps in very short periods of times, and if you are not there when it peaks, then you’ve missed out on most of the returns.”
While financial advisers can help clients with asset allocation, individuals have to be disciplined enough to stick with the plan and rebalance.
“That’s the surefire way of achieving long-term goals in a risk-control manner,” Iyer said.
Investors also can diversify by including alternative investments in their portfolios, such as high-yield bonds, market neutral vehicles, hedge funds and real estate investment trusts, he said.
While only high net worth individuals might be able to invest $500,000 in a hedge fund, it is possible for all types of investors to take advantage of more broad-based alternative investments with as little as $1,000 to $10,000, Iyer said.
The typical investor probably should have no more than 20 percent invested in alternative investments, he said.
Iyer noted that since being launched in May, the One Group Market Neutral Fund has been “sensationally successful” and already has $390 million in assets. The fund attempts to neutralize exposure to domestic market risk by primarily investing in common stocks that Banc One considers attractive and short-selling stocks it considers unattractive.
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