Soothe Your Aching Investment Portfolio

Physician's Money DigestJanuary31 2005
Volume 12
Issue 2

When undertaken properly, portfolio reallocating may be as unique as a Picasso, Chagall, or Parkes. Portfolio allocating consists of periodically reviewing a portfolio and over-or underweighing asset classes based on economic outlooks coupled with a client's risk tolerance. Physician-investors would be wise to reallocate rather than rebalance their portfolios.

Rebalancing Act

The practice of rebalancing a portfolio contains the philosophy of the equal spread of asset classes, regardless of the economic environment, and is solely concerned with a client's risk tolerance. Rebalancing is often created based on anticipated performance supported by historical performance numbers. For example, in 2003, many investors purchased long-term bonds because these bonds did well in the previous 5 years. However, these investors did not look to the future and ignored signs of rising interest rates.

Markets are not static and different asset classes enjoy periods of expansion and contraction, sometimes simultaneously. If a portfolio is not actively managed, money can be wasted, or worse, earnings opportunities can be missed. Active involvement and ongoing assessments of one's holdings are important elements to consider in the pursuit of growing and maintaining wealth. Portfolio reallocating goes well beyond rebalancing. Reallocating gives the portfolio the flexibility to keep in step with ever-changing market climates and the evolving personal needs of the investor.

Probability analysis is a key theory in the allocation process. Probability analysis enables an investment advisor to predict a wide range of possible outcomes in changing market conditions, which establishes the likelihood that desired planning objectives will be attained. The probability analysis process begins with gathering qualitative and quantitative details about an investor's financial situation. This includes everything from income and assets, to long-term personal and financial objectives, to retirement needs.

Probability analysis tests various scenarios to determine how different investment strategies could affect the probability of achieving the investor's goals. Through modifying variables (eg, assets, risk, retirement needs, retirement age, etc) and reviewing current economic environments, it is possible to assess various investment strategies. For example, if a child throws a pebble into a pond, there is a 100% probability that there will be a ripple. However, the probability of the ripple lasting 30 seconds changes when you add wind effect, the depth of the pond, and the weight of the pebble. To properly allocate a portfolio, an advisor cannot simply rely on the 100% probability of a ripple; they need to consider all of the other factors.

Ripple Factors

When an advisor looks at a portfolio, they must take into consideration the uniqueness of that portfolio. An investor's risk, objectives, goals, the current economic environment, interest rates, earning reports, retail sales, oil prices, and labor reports are all things that need to be considered when allocating a portfolio.

Reallocating is not like going into the grocery store and buying one of every item. When someone does that, they will have products that will sit on their shelf for months or even years. They might even purchase a product they never knew existed. This mass buying is similar to rebalancing. An investor will have a little of this and a little of that and may simply break even in a mediocre market. A properly allocated portfolio will contain all of the desired asset classes, but will underweigh the classes that are predicted to underperform and overweigh the classes that show promise.

Rebalancing can be done by almost anyone. But reallocating takes a great deal of work, time, and knowledge. Generally, an individual can only get this level of service from an advisor or firm offering private portfolio management. Learning the finer points of effective portfolio allocating can take years of practice and is a classic example of a task best left to experienced financial professionals.

specializes in portfolio management

and in developing high-net-worth strategies.

He is the principal investment advisor at Valentine

Capital Asset Management of San Ramon,

Calif. He welcomes questions or comments at 925-

275-0200, or visit Valentine

Capital Capital Asset Management, Equity Research

& Portfolio Evaluation, and Securities America Inc are independent

entities. Securities offered through Securities America Inc, member

NASD/SIPC, a registered broker/dealer. Securities America Inc as a firm

does not make a market in, conduct research on, or recommend the purchase

or sale of any of the above issues. Compliance mandates disclosure

of all purchase and sell prices for means of performance.

John Valentine

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