I recently met a new couple at a party this last weekend. In our group, the husband of the new couple asked what we all did for a living. When I stated that I was a investment portfolio manager at a wealth management firm, he came back to me in front of the group and asked my thoughts on allocations to stocks and bonds. My wife was with me and my good friend was with me and I knew that they knew my answer could get really long.
I told the husband that my answer to his question would have a long answer because the question isn’t a simple one from someone like me who understands the question and many answers. I essentially indicated that my wife would probably want to stop me from having the discussion and my buddy just mentioned that I get really into these discussions because I’m very passionate about helping people understand the markets and investing better after they’ve met me and had a discussion with me.
I think the husband got the hint that me going on and on about the question itself and the answer he may get would be long. I told him I’d be more than happy to help him whenever he wanted, but yeah, the party might not be the best time.
If this website was up and running when that question came up, I would have immediately pointed it to him and he may have much better insights into the question, answer and direction he could take on his own if he wanted to. Otherwise, I’d be there to help in my advisory role.
If we look at the question itself: “What are your thoughts about a stock and bond allocation?” it really is a loaded question. The answer solely relies on the person asking the question.
- What is that person’s risk tolerance? Can they handle a 40% decline in their portfolio? Do they continue to add more money in their account that can replace any short-term market losses? Do they need the money in a year or 20 years?
- What is their typical investment style preference? Are they long-term investors? Do they favor short-term tactical moves? Do they prefer U.S., international, global strategies? Do they want aggressive, innovative growth stocks? Do they favor capital appreciation, income or both? Do they want exposure across market caps? Do they like individual stocks/bonds or packaged products (mutual funds, ETFs, etc.). Do they want passive, low-cost strategies, active managers, or both? Are you trying to match or “beat” a particular market index?
Then, once you get a sense of what the person’s risk tolerance and investment style preference in, we need to dial in the actual investments. There are thousands of stocks and bonds to choose from across various sub-styles/sectors/industries. Depending on the preference for types of stocks or bonds, that can drive a portfolio’s volatility, income, capital appreciation potential, and overall experience for the client during different market environments.
- What type of stocks? Aggressive growth? Innovative, non-profitable companies today with high risk/high potential? Slower growing, steady-eddy, dividend-paying stocks? Certain sectors to invest in or avoid? Attractively valued or companies with stock prices moving with strong momentum? Deep value stocks that are going through short-term headwinds? Does geography or market cap matter?
- What type of bonds? Treasuries? Corporate bonds? Asset-backed securities? Mortgage bonds? Floating rate or fixed rate bonds? Short-, medium- or long-duration bonds? Investment grade or below investment grade? Taxable or tax-exempt? U.S., international or both? U.S.-dollar-denominated or is foreign currency exposure ok?
As you can see, a simple question of “What are your thoughts on a stock and bond allocation?” gets my brain going very quickly. I could spend a very long time trying to figure out what is the best allocation for that specific person. There is no right answer for everyone.
Based on my experience, a below-average financial advisor looking for business may just give an answer to “sound smart” and give their opinion on the markets, where they think the markets are going and give an allocation “recommendation”. Remember, everyone has an opinion, even multiple smart people with all the same resources can come to different opinions.
In my opinion, the better financial advisor would take the approach I would take, which is to really dig down into the person’s objectives, risk tolerance and investment preferences. If you are thinking about the right stock and bond allocation on your own, make sure you go through this process to figure out what you are really trying to accomplish with that question. Hopefully this website will help you do exactly that.