Here in North Texas, we watch the last remains of the all-time record snow fall melt, despite the unusually cool current temps - more than twelve inches fell and stayed on the ground last week. Combined with a winter of consistently colder temperatures here in the South, record snowfalls elsewhere in the country, the heretofore “obscured” evidence of leading scientists who refute the concept, and it seems that intelligent, independent observation is beginning to carry the day: man made global warming is just as true as Al’s claim that he invented the internet. By the way, where have you been recently Mr. Gore? Did an inconvenient truth get in your way?

Given a similar set of intense evidence (The 2008 - 2009 market melt down) against asset allocation as a portfolio tool to reduce risk and increase returns, you would think that there would also be a reversing of the tide regarding this ridiculous theory. Alas, there is not. In fact, in many circles, the clarion call in favor of asset allocation has gotten only stronger. Let me explain.

When most people hear the words “asset allocation” they think about the concept of diversification. Who could possibly be against “diversification”?! It’s like claiming to be against “fairness”. For crying out loud, even the Bible supports the concept of diversification when it says in Ecclesiastes 11:1-2 “Cast your bread upon the waters, for after many days you will find it again. Give portions to seven, yes to eight, for you do not know what disaster may come upon the land” (Nobody really thinks the Bible is worthless and outdated).

Unfortunately when financial planners, investments advisors, and investment managers, say asset allocation, they mean something insidiously different than simple diversification. What these folks mean is a statistical analysis of ONLY past investment returns, focusing extensively on a statistic called standard deviation, or the amount that a return deviates from the average. In this window, anything with a high standard deviation is negative. In the ultimate irony, an investment with a high rate of return is considered a bad thing in this “analysis”. OK, well enough about standard deviation.

The reason that high returns are discounted is because asset allocation considers them impossible. Yes, that’s right, impossible. Another of the basic premises here is that it is impossible to outperform the market - even if you were to trade on inside (illegal) information - the ultimate statement on how “crime doesn’t pay”. Now according to asset allocation proponents, crime doesn’t pay if you get caught, but crime doesn’t pay even if you don’t. Have we reached the depth of the ridiculousness yet? Not Quite.

If you think about it, it is as clear as Al Gore’s Nobel Peace Prize that what makes for investment success is what happens in the future, and not the past. But, asset allocation pays absolutely no attention whatsoever to assessing what the future holds for any investment or sector. No wonder it can’t outperform the market!!

Finally, asset allocation says that it doesn’t matter what specific investments you purchase as long as you are in the “right sectors”. This is akin to investing in real estate by purchasing an entire county, instead of individual properties in the county. Here is a delightful property at 1200 Pennsylvania Avenue (just four blocks from the White House - Photo courtesy of Ryan Balis) - any body want to buy all of Washington D.C.? How about just the square mile on which the White House rests? I didn’t think so.

An investor like Warren Buffett has consistently beaten the market averages for more than 40 years. My firm, The Barfield Group, has done it for more than 15 years. What do the asset allocation adherents have to say about hard evidence such as this? Only that “there are [infrequent] anomalies that do exist”.

If you are going to retire in the next ten years or if you are already in retirement, to be successful you’re going to have to do things drastically different than you have been doing them. We’ve written a paper entitled, “11 Ground Rules for Rebuilding Your Retirement Investment Portfolio“. Send me an email to dana@thebarfieldgroup.com with your name, age, and mailing address and I’ll send you a free copy. By the way, we never sell, share, rent, or otherwise abuse your information.