Asset allocation is a little likeposition assignments in basketball: there are distinct roles, but in realitythey become somewhat fluid. Like a basketball coach, you should keep your assetallocation flexible enough to adapt to the current situation.
For example, the traditionalbasketball line-up is two guards, two forwards, and a center player. However,sometimes a team may go with a three-guard line-up, and often teams playwithout a true center. Similarly, asset allocation should have both generalparameters and the ability to adjust to the situation. Certainly, with average rateson savings accounts and money market accounts down around0.20 percent, an adjustment might seem tempting.
Fixed vs. active asset allocation
Conventional retirement plannerswill often suggest a fixed asset allocation, based on the historicalcharacteristics of cash, stocks, and bonds. The problem is that investmenthistory doesn't repeat itself in an orderly manner. Anyone who has expected theusual high returns from stocks over the past decade has found that out the hardway.
A better approach is to let historybe a guide, but not an absolute dictator of asset allocation. So, a person withtwo years to retirement should probably not be 100 percent in stocks, andneither should a twenty-five-year-old's retirementaccount be primarily in cash. However, within certain sensible parameters, theyshould adjust their allocations to meet prevailing risks and opportunities, andprofit.
Reacting to low savings and moneymarket rates
For example, currently, you may bethinking about switching out of those low-paying savings accounts, money market accounts, orCDs to other securities. Bonds, for example, will give you a bump in yield toabove 3 percent, but unlike deposit accounts they will lose money if interestrates rise. Stocks have the potential for higher growth, but having alreadybounced back by more than 75 percent from their early-2009 lows, they alsorepresent more risk and less return potential thanthey did a year or two ago.
In short, a basketball coach mustalways be ready to assess risk and make a substitution. Before doing so though,he must have an idea whether the player going in is any good, so do yourresearch beforehand.
The original article can be found at Money-Rates.com:
"Why your asset allocation should be flexible--like basketball"