Over the last 20+ years, common wisdom has focused on what is known as “Modern Portfolio Theory” – the belief that diversification or “the pie chart method” of spreading investments between stocks, bonds and mutual funds will help protect against large losses.
The problem with the “pie chart method” is that it still requires that the markets go up in order for you to have enough money to retire. Unfortunately, using this theory, the average investor has barely made a little over 2.34% over the last 20 years, while the S&P 500 has earned close to 8%.* In 2008, we saw a clear demonstration of how investors cannot depend on asset allocation to protect their portfolio from sudden and significant losses.
The solution to this is Purpose Based Asset Management (PBAM).
PBAM recognizes that meeting your financial needs over 15, 20 or 25 years requires multiple investment strategies. Money that will be needed in the next five years should be invested differently than assets that won’t be needed for 15 or 20 years. By using a combination of safe and risk investments, PBAM allows our clients to sleep at night knowing that their money will last to and through their retirement.
For individuals that will not retire for another 10, 15 or 25 years or more, multiple investment strategies allow for participation in more of the market. This provides greater diversity and more investment opportunities.
* Dalbar Study 2010 QAIB. This study was conducted by an independent third party, Dalbar, Inc., a research firm specializing in financial services. Dalbar is not associated with TFG Wealth Management. A copy of the study is available upon request.