(240) 482-3752 | msmith@wcfingroup.com
Retirees Can Protect Their Retirement Money With Better Asset Allocation

Retirement Planning

Retirees Can Protect Their Retirement Money With Better Asset Allocation

Part 2 in our series: 5 Ways Retirees Should Protect Their Money During Retirement

After 23+ years as a Financial Advisor, I can attest to the truth that retirees can protect their retirement money with better asset allocation. Asset allocation is a discipline. It is the process of assembling a portfolio that is diversified in the type of investments that comprise the portfolio. For example, a broad and very overly stated asset allocation is “stocks, bonds and cash”, or “stocks, bonds and mutual funds.”

The problem with the above example of asset allocation is that while a portfolio may include stocks, bonds, cash and mutual funds, that general allocation does not prove that the portfolio is truly diversified. For the most part, it is diversified in name only. I have seen hundreds of portfolios with very similar characteristics, which is why I finally decided to write a blog post on how retirees can protect their retirement money with better asset allocation.



Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve.

~Talmud, Circa 1200 B.C. – 500 A.D.

Should I Be Diversified By Asset Allocation or Asset Class Diversification?

While not guaranteeing an investment portfolio from market losses, the purpose of owning a diverse portfolio (whether it is a 401(K), IRA or even the “sub-investments” within a variable annuity or life insurance policy) is not to prevent a down market, but to limit the potential losses that could be sustained by your portfolio during a down market.

In other words, asset allocation represents a best efforts approach, in hopes of achieving a minimum of maximum rate of return within an acceptable range of performance. In his book entitled, “Asset Allocation”, Author Roger C. Gibson offers four suggestions for how to design an investment portfolio:

  1. Deciding which asset classes will be represented in the portfolio

  2. Determining the long-term “target” percentage of the portfolio to allocate to each of these asset classes

  3. Specifying for each asset class the range within which the allocation can be altered in an attempt to exploit better performance possibilities from one asset class versus another

  4. Selection of securities within each of the asset classes

I agree with Roger C. Gibson’s steps for designing an investment portfolio, because without asset allocation investing is like going to the casino and gambling with your money. Investing with only a focus of “making money” is not a plan, and at best it is no different from guessing. It is either hit or miss.



1. Deciding Which Asset Classes Will Be Represented In The Portfolio

Since an investment portfolio is comprised of what it holds, we have to first determine the suitability of the type of investments that should be purchased and why. When counseling with clients about their investments, I want to find out what percentage of their portfolio is invested across the following asset classes:

  • Small Cap
  • Mid-Caps
  • Large Caps
  • Real Estate
  • International
  • Fixed Income
  • Commodities

A common question that I receive is, “what is the difference between a “Large Cap vs. Small or Mid Cap” type of investment. The word “cap” is short for “Capitalization.” According to Investopedia, “The market value of capital depends on the price of the company’s stock. It is calculated by multiplying the price of the company’s shares by the number of shares outstanding in the market. If the total number of shares outstanding is 1 billion and the stock is currently priced at $10, the market capitalization is $10 billion.

Retirees Can Protect Their Retirement Money With Better Asset Allocation

Companies with a high market capitalization are referred to as Large caps. Companies with medium market capitalization are referred to as Mid caps, and companies with small capitalization are referred to as Small caps. A general rule of thumb for distinguishing between large caps, mid-caps and small caps is large caps have a market capitalization of $10 billion+, Mid-caps $2 to 10 billion and Small caps $300 million to $2 billion.”

It is important to note that the rate of return of small, mid and large caps differs considerably, based on economic conditions. Therefore, it is important that you know which asset classes are represented in your portfolio. At Wealthcare Financial Group, Inc. we take a more specific approach to achieving a diversified portfolio, which we refer to as “asset class diversification” vs. “asset allocation”.



2.Determining the long-term “target” percentage of the portfolio to allocate to each of these asset classes

The pie chart on the far left is colored coded to reflect the broad asset class percentage representation of the portfolio. For example, there is 1% allocated to Cash, 48% to U.S. Stocks (represented in the “Stock Style Diversification Holdings Detail on the right), e.g. Large, Medium, Small, 22% to Foreign (which will also have its own “small, mid and large” equity classification), including 29% to Bonds.

Retirees Can Protect Their Retirement Money With Better Asset Allocation

The above Morningstar Style Box is for illustrative purposes only. Not to be construed as a recommended portfolio allocation for anyone.

What many investors are not aware of is the average annual performance among the various asset classes. For example, notice that 71% of the portfolio is allocated to large caps vs. only 6% for the small cap category and 24% for the Mid cap category. One might assume that the reason for the over weighted position is because Large caps have historically (e.g. over periods of 3, 5 and 10 years) outperformed Small and Mid-caps, right? WRONG!


The chart below shows the average annual performance of Large, Small and Long Term Government Bonds. Which asset class has the overall better performance in each of the four periods shown? The point which I am making here isn’t that one asset class is more or less suitable for a person’s investment portfolio.

Retirees Can Protect Their Retirement Money With Better Asset Allocation

When reviewing a prospective clients investment portfolio, it is very common to find that they are over weighed in large caps. This simply begs the question of whether the performance of large caps has been better than other asset classes during the same period of time.

The next question is, how would the portfolio perform if each asset class had an equal percentage allocated to it?

Retirees Can Protect Their Retirement Money With Better Asset Allocation

The above chart is for illustration purposes only, not an actual recommended asset class range.

3. Specifying for each asset class the range within which the allocation can be altered in an attempt to exploit better performance possibilities from one asset class versus another.

This is where having a good understanding about how the economy works is very important. If I were to ask, “what would your asset class allocation look like if today was exactly one month prior to The Great Recession which began during the month of December 2007?”.

If you are concerned about the performance of your portfolio, then I would assume that the asset class range of your portfolio would look like this:

  • Equities = 0%
  • Fixed Income =0%
  • Cash = 100%

The reason why the range is some important is because you should adjust the percentage of funds allocated to a certain asset class either based on a reasonable hypothesis about the future direction of the economy, or based on how the current economic conditions is impacting your investments. If you are a retiree and is concerned about generating income from your portfolio, then adjusting the percentage weighting among the various asset classes is vital.



Retirees Can Protect Their Retirement Money With Better Asset Allocation

This chart provides a visual illustration of what is referred to as the “Economic (Business) Cycle”. There are five “sessions” to The Economic Cycle: Peak, Recession, Trough, Recovery, Growth (aka “expansion”). During the Growth and Peak seasons of the economic cycle, the stock market is typically correlated in such a way that growth investors may experience an increase in the overall value of their portfolios. In addition, when the market is experiencing an extended period of growth, there is a greater probability for the rate of inflation to increase. As the threat of inflation becomes more apparent, a move that the Federal Reserve will consider is to increase interest rates, as a way to offset, or limit the growth rate of inflation.

From an investment point of view, which “asset class” would potentially be more attractive to a retiree during a Growth through Peak season period of the economic cycle? How about Bank or Brokerage Certificates of Deposit, or Bonds that offers an attractive yield? Does this mean that 100% of a person’s portfolio should be allocated to fixed income and cash? Probably not.

However, the threat of inflation which could influence the Fed to raise interest rates. If so, this presents an attractive opportunity to do a little investment percentage (i.e. asset class) “range shifting”, in hopes of being able to generate additional income within a portfolio. Likewise, what happens to Real Estate as an asset class when the economy is in a Recession? Are you beginning to understand why retirees can protect their retirement money with better asset allocation?



4. Selection of securities within each of the asset classes

Retirees Can Protect Their Retirement Money With Better Asset Allocation

Again, look at the behavior of the Federal Reserve. While not an absolute (we have to leave room for the possibility of the influence of “event risk” on the economy such as government or corporate malfeasance, wars, terrorism, etc.), during a “peak” in the economic cycle, interest rates have risen to its highest point causing the market cool off some what.

In the event that tightening interest rates results in three consecutive quarters of negative GDP, then the economy is officially in a recession. As a way to stimulate the economy -and have a positive impact on housing, as well as employment- the Federal Reserve will reduce interest rates, which tends to have a positive impact on asset classes such as real estate and certain types of bonds.

The needs of investors are unique, therefore the construction of their investment portfolios should also be unique. I emphasize “should” because many of the portfolios that I have reviewed from large brokerage firms are not unique to each investor. In fact, the typical asset allocation that I notice with accounts that have a minimum of $500,000 includes: Large Caps, Bonds, Real Estate and International…and this is almost without fail.

It’s called “rubber stamping” and unfortunately, it doesn’t take into consideration the unique circumstances of different people. At Wealthcare Financial Group, Inc. we believe that an investment portfolio should reflect the asset classes which are appropriate for each individual, given the current economic conditions that will have a unique impact on the various asset classes.



When building a custom model portfolio for our clients, we generally utilize the following asset classes, in order to appropriately diversify their portfolio based on our understanding of the economy and where we believe that it may be headed in the future, as well as our understanding of their risk tolerance, income needs and performance goals:

  • Small Value and Growth
  • Mid Value and Growth
  • Large Value
  • Real Estate
  • Fixed Income (U.S. Treasuries, Agencies, Corporate, Municipal, Certificates of Deposit)
  • International (100% Foreign)
  • Global (Foreign and Domestic)
  • Commodities
  • Alternative Investments

Retirees Can Protect Their Retirement Money With Better Asset AllocationReceiving a free Sample Portfolio Review & Analysis of your IRA, 401(K) or taxable brokerage account is critical to the successful management and performance of your retirement investments. Our firm,Wealthcare Financial Group, Inc. prepares free portfolio reviews and comparative investment analysis with no obligation. Feel free to contact me if you would like to receive an in depth portfolio review. (240) 482-3752 |msmith@wcfingroup.com



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