Strategize to Create an Optimal Portfolio

Physician's Money Digest, December 2005, Volume 12, Issue 16

Strategic asset allocation means allocatingyour money to differentasset classes using sophisticatedmodeling techniques and modern portfoliotheory. Modern portfolio theoryrequires calculating the risks and potentialreturns for your entire portfolioinstead of focusing on the individualsecurities. The goal is to create an optimalportfolio that provides the greatestexpected return for a given level of risk.

Bear in mind that a portfolio that'soptimal today may not be optimaltomorrow. Hundreds of changing variablesinteract to raise or lower the risksand potential returns of various assets.Based on past performance of marketsectors, allocating more assets to advancingclasses and reducing investmentin declining ones may enhance returnswith less risk. Thus, it's important toreview allocations quarterly and readjustthem as needed. This will continuallybalance correlated asset classes to maintainoptimal portfolios for aggressive,growth, conservative, and middle-of-the-road investors.

Making smart allocation decisionsdoesn't involve consulting market guruswhose track record is no more dependablethan flipping a coin. Instead, asophisticated approach is based onmany statistical indicators, such asmoving averages, stochastics, trendlines, and money market yields. Thisremoves emotion from investing.

Choosing well-managed mutualfunds is the other half of the equation.Besides having top-notch investmentmanagement, each fund must reliablyrepresent its asset class and not meanderhaphazardly. But neither physicians norskilled financial advisors are equipped toregularly reallocate portfolios to maintainthe optimal mix of asset classes. Itmakes sense for your advisor to hire anoutside service that has demonstrated itsworth in up and down markets over thelong haul. Such a service is automatic,and once the program has been set up,you don't have to lift a finger. The serviceprovides elaborate reports and chartsthat explain what moves were made andthe rationale behind them.

The combination of broad diversificationand strategic asset allocation providescushioning that helps you stay thecourse instead of buying high and sellinglow. The bigger your portfolio, the moreyou have riding on it. Market timing,where you're totally in or out of themarket, is risky because you might beout when you should be in, or vice versa.Buy-and-hold is also risky because itleaves you completely exposed to bigdownturns. Strategic asset allocationmay offer a best-of-both-worlds approach:cushioning from the jaggededges of the market while keeping youpositioned for growth and income.

Frank Congemi, a financial advisor living in

Deerfield Beach, Fla, with an office in

Forest Hills, NY, works with many physicians

in several states. He welcomes questions

or comments at frank@frankcongemi.com or 800-228-2309.