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Helping Larchmont Families Plan for the Future
Ian A. Post, CFA, CFP®
Fifth Set Investment Advisors LLC • 2065 Boston Post Road • Suite 200 • Larchmont, NY 10538
Email: ipost@fifthsetinvestment.com • Web: www.fifthsetinvestment.com • Phone: 646-783-9717
• Portfolio Management
• Financial Planning
• Investment Insights
Investment Corner
IanA.Post,CFA
Afew weeks ago, a client and I were re-
viewing asset class returns for the year
when we began discussing the underlying
reasons for always owning every major asset
class, an investment approach called strategic
asset allocation1.
Implementing a strategic asset allocation
approach ensures an investor always has ex-
posure to the best performing asset classes. It
also ensures the investor always has exposure
to the worst performing asset classes. This
begs the question, “why adopt a strategy that
ensures ownership of the worst performing
asset classes every year”? The answer is that
strategic asset allocation offers the best of a
bad set of options when designing portfolios.
It addresses the underlying problem we face
when designing portfolios which is that we
don’t know which asset classes will perform
well in the next year and which ones won’t.
To highlight the issue, let’s go back in time
to the end of 2015. At the end of the day
on December 31st 2015, we review the best
and worst performing asset classes for the
year. The winners were Municipal Bonds2
(3.3%), Real Estate Investment Trusts (RE-
ITs3) (2.8%) and Large U.S. Stocks⁴ (1.4%).
The losers were Emerging Market Stocks⁵
(-14.6%), Small U.S. Stocks⁶ (-4.4%) and
International Developed Stocks⁷ (-0.4%).
Investors are naturally drawn to the best per-
forming investments so one idea for creating
a portfolio for 2016 might be to form an equal
weighted portfolio of the top three perform-
ing asset classes from 2015. A “winner” port-
folio based on that approach would place one
third of the portfolio value in each of Munic-
ipal Bonds, REITs and Large U.S. Stocks. For
comparison purposes, we could also form a
portfolio based on the losers from 2015. The
“loser” portfolio would include one third in
each of Emerging Market, Small U.S. and In-
ternational Developed Stocks.
Now, let’s bolt ahead to late December 2016⁸.
How did our portfolios do? The “winner”
portfolio gained 6.6% YTD. Not bad.
Andthe“loser”portfolio?Thatwasup10.4%!
Amazingly, the portfolio composed of the
worst performing asset classes from 2015 re-
turned almost twice that of the best perform-
ing asset classes from the prior year.
Why does this happen? We see this kind of
result because security returns are mostly
random over short periods of time. Good or
bad returns in one period tell you nothing
about asset class returns in the next period.
This leads us back to the case for utiliz-
ing strategic asset allocation. A portfolio
designed with exposure to all major asset
classes at all times ensures that you won’t
miss out on the year’s big winner (U.S. Small
Stocks in 2016, up 21.7%). Strategic asset al-
location benefits also include low trading and
tax costs as well as a consistent exposure to
market risk. Without a crystal ball to show
us how asset classes will perform each year,
the best approach to managing the annual
cliffhanger is to own everything all the time.
Fifth Set Investment Advisors LLC is a registered in-
vestment adviser. Information presented is for edu-
cational purposes only and does not intend to make
an offer or solicitation for the sale or purchase of
any specific securities product, service, or invest-
ment strategy. Investments involve risk and unless
otherwise stated, are not guaranteed. Be sure to
first consult with a qualified financial adviser, tawx
professional, or attorney before implementing any
strategy or recommendation discussed herein.
Larchmont resident Ian A. Post, CFA is the Principal of Fifth Set Investment Advisors LLC. Fifth Set is the result of his evolution of thought in regard
to conventional investment management. His experience and education led to research for a smarter approach to portfolio management and
financial planning. Prior to Fifth Set, Ian conducted fundamental equity research at Citigroup, Credit Lyonnais and CIBC Oppenheimer. Ian earned
a BS in Engineering and Public Policy from Washington University and an MBA with concentrations in Finance and Statistics from NYU and is a
holder of the Chartered Financial Analyst designation, a member of CFA Institute and a CERTIFIED FINANCIAL PLANNER certificantTM
1
A portfolio strategy that involves setting target allocations for various asset classes, then rebalancing the portfolio to maintain these original allocations. (www.investopedia.com) 2S&P National
Municipal Bond Index 3Dow Jones Equity All REIT Index ⁴S&P 500 ⁵MSCI Emerging Market Index ⁶Russell 2000 Index ⁷MSCI EAFE Index ⁸YTD 2016 performance is based on closing prices
from 12/22/16.

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Asset Class Returns: The Ultimate Cliffhanger

  • 1. 8 Helping Larchmont Families Plan for the Future Ian A. Post, CFA, CFP® Fifth Set Investment Advisors LLC • 2065 Boston Post Road • Suite 200 • Larchmont, NY 10538 Email: ipost@fifthsetinvestment.com • Web: www.fifthsetinvestment.com • Phone: 646-783-9717 • Portfolio Management • Financial Planning • Investment Insights Investment Corner IanA.Post,CFA Afew weeks ago, a client and I were re- viewing asset class returns for the year when we began discussing the underlying reasons for always owning every major asset class, an investment approach called strategic asset allocation1. Implementing a strategic asset allocation approach ensures an investor always has ex- posure to the best performing asset classes. It also ensures the investor always has exposure to the worst performing asset classes. This begs the question, “why adopt a strategy that ensures ownership of the worst performing asset classes every year”? The answer is that strategic asset allocation offers the best of a bad set of options when designing portfolios. It addresses the underlying problem we face when designing portfolios which is that we don’t know which asset classes will perform well in the next year and which ones won’t. To highlight the issue, let’s go back in time to the end of 2015. At the end of the day on December 31st 2015, we review the best and worst performing asset classes for the year. The winners were Municipal Bonds2 (3.3%), Real Estate Investment Trusts (RE- ITs3) (2.8%) and Large U.S. Stocks⁴ (1.4%). The losers were Emerging Market Stocks⁵ (-14.6%), Small U.S. Stocks⁶ (-4.4%) and International Developed Stocks⁷ (-0.4%). Investors are naturally drawn to the best per- forming investments so one idea for creating a portfolio for 2016 might be to form an equal weighted portfolio of the top three perform- ing asset classes from 2015. A “winner” port- folio based on that approach would place one third of the portfolio value in each of Munic- ipal Bonds, REITs and Large U.S. Stocks. For comparison purposes, we could also form a portfolio based on the losers from 2015. The “loser” portfolio would include one third in each of Emerging Market, Small U.S. and In- ternational Developed Stocks. Now, let’s bolt ahead to late December 2016⁸. How did our portfolios do? The “winner” portfolio gained 6.6% YTD. Not bad. Andthe“loser”portfolio?Thatwasup10.4%! Amazingly, the portfolio composed of the worst performing asset classes from 2015 re- turned almost twice that of the best perform- ing asset classes from the prior year. Why does this happen? We see this kind of result because security returns are mostly random over short periods of time. Good or bad returns in one period tell you nothing about asset class returns in the next period. This leads us back to the case for utiliz- ing strategic asset allocation. A portfolio designed with exposure to all major asset classes at all times ensures that you won’t miss out on the year’s big winner (U.S. Small Stocks in 2016, up 21.7%). Strategic asset al- location benefits also include low trading and tax costs as well as a consistent exposure to market risk. Without a crystal ball to show us how asset classes will perform each year, the best approach to managing the annual cliffhanger is to own everything all the time. Fifth Set Investment Advisors LLC is a registered in- vestment adviser. Information presented is for edu- cational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or invest- ment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser, tawx professional, or attorney before implementing any strategy or recommendation discussed herein. Larchmont resident Ian A. Post, CFA is the Principal of Fifth Set Investment Advisors LLC. Fifth Set is the result of his evolution of thought in regard to conventional investment management. His experience and education led to research for a smarter approach to portfolio management and financial planning. Prior to Fifth Set, Ian conducted fundamental equity research at Citigroup, Credit Lyonnais and CIBC Oppenheimer. Ian earned a BS in Engineering and Public Policy from Washington University and an MBA with concentrations in Finance and Statistics from NYU and is a holder of the Chartered Financial Analyst designation, a member of CFA Institute and a CERTIFIED FINANCIAL PLANNER certificantTM 1 A portfolio strategy that involves setting target allocations for various asset classes, then rebalancing the portfolio to maintain these original allocations. (www.investopedia.com) 2S&P National Municipal Bond Index 3Dow Jones Equity All REIT Index ⁴S&P 500 ⁵MSCI Emerging Market Index ⁶Russell 2000 Index ⁷MSCI EAFE Index ⁸YTD 2016 performance is based on closing prices from 12/22/16.