Advisors feeling discouraged by investment returns of the past few years shouldn’t be so quick to give up on asset allocation as an investment strategy, according to Dave Paterson, director of research, investment funds, at D.A. Paterson and Associates Inc. in Toronto.
“In the past few years, I’ve heard from a lot of advisors and a lot of investors that [asset allocation] is dead,” said Paterson who spoke at the Fall Income Roadshow 2012 in Toronto on Friday, “[and] the reason that it’s dead is that it didn’t work when the world went to hell in 2008.”
However, the issue is not asset allocation itself, according to Paterson, but that the majority of advisors do not properly diversify portfolios. For example, many portfolios are heavily weighted to Canadian equities with a little bit of U.S and international exposure, he said. Following that strategy, a portfolio consisting of $100,000 invested in May 2008 would have fallen to $60,000 by Feb. 2009, he said, which is only slightly better return than an investment in the TSX composite index.
In this scenario, the portfolio was properly diversified across geography, market sector and even market capitalization, said Paterson, but the invested funds were not distributed across the four asset classes.
“The problem is that a lot of advisors focus too much on equities,” he said. “There are actually four asset classes: you’ve got cash, fixed-income, equity and what I’ll call real assets, such as real estate. Everything is one of those or a derivative of one of those.”
As such, when properly diversified across all four categories, said Paterson, that same $100,000 portfolio would only have fallen by 17.5% between 2008 and 2009.
“Asset allocation is dead? Asset allocation doesn’t work?” said Paterson, “No, in fact, it is very much alive.”