Asset Allocation and Rebalancing: Back to the Basics

Q&A with Marcie Behman, Wealth Management Advisor for Merrill Lynch Global Wealth Management, Boston, MA

Through the market crash in 2008, and more recently in the recovery phase, what is the most common mistake that you see investors making?

The most common mistake that we see is that investors seek opportunities that are emotion-driven rather than part of a disciplined investment strategy – making investment decisions guided by their hearts instead of their heads. As a result, many of the investors will take too much risk going into a bear market and not enough risk coming out. For all the time that is spent trying to “re-create the wheel”, investors all too often forget the most basic lessons in asset management and end up with a strategy that is not aligned with their goals. Many affluent investors have an objective of growing their wealth without taking on excessive risks. However, many less sophisticated investors will assume what they believe is reasonable risk but do not truly understand what the potential for losses and volatility are with the investments they hold.

What are some examples of mistakes that investors can make going into and coming out of a bear market?

When the market was running up in 2006 and 2007, everyone was talking about international markets, commodities, and emerging markets. There was a lot of money to be made in those markets, but putting all of your money in these areas did not bode well when the market turned around. More recently, we have started to see the same problem in Treasuries. As everyone raced into the some of the safest asset classes, they too began to turn.

As we are in a bear market now, has the past year changed your approach to managing wealth?

No. The core of every relationship is still the same. This begins with setting an asset allocation that is in line with the clients risk profile. The key is making sure the investor understands the risks presented. With allocation, the goal is to identify investments that do not move in tandem (diversification). This has always remained consistent. What we do is continuously look for ways to enhance the platform that we use to manage our allocation so our execution is better. Being able to rebalance when you want to is of utmost importance. As market shifts occur, an investor must have the ability to reposition themselves efficiently and effectively.

How often should investors rebalance?
While some investors will only focus on a certain periodic frequency, it is also important to consider the allocation shift that occurs during volatile times and the market environment we are in. If, after a large move in the market, a portfolio has a smaller or larger percentage allocated to a certain asset than originally desired, rebalancing may be appropriate. Investors at the same time must understand the economics behind these changes and consider their tolerance for risk if they are rebalancing into more a more aggressive allocation. This can sometimes present a difficult challenge between emotional investing and prudent decision making.

Marcie Behman; Merrill Lynch Global Wealth Management; marcie_behman@ml.com