18
Maxiinize your assets for the long term
By ANTHONY J. DOMINO JR.
Balance is a
funny word. It can
imply something
that is in the lurch
or unstable, or well
rounded and diversi-
fied. In the world of
investing assets — it
is the latter defini-
tion that seems to
Domino Jr.
fit hest. Since Harry
Markowitz offered his theory of efficient
markets, and subsequent economists prof-
fered the theories of asset allocation and
modem portfolio theory, the concept of hal-
ance has heen the dominant and most suc-
cessful approach to profitable investing.
In general, assets are bunched within
broad categories (stocks, bonds, cash, real
estate, etc). In turn, each category is refined
even further (subsets of stock include small
cap, mid cap, large cap, international, etc).
Quite simply, asset allocation is the process
of determining the most efficient allocation of
your portfolio among these classes. The two
most relevant factors are your risk tolerance
and the time horizon of your investment.
like most qucintitative cinalyses, there
can be only one "winner" among asset
classes. In any given economic cycle, it is
quite safe to say the most recent top per-
former will most likely be tbe laggard down
the road. Thus, spreading your investment
among asset classes will be the most assured
way to maximize consistent overall return.
Studies have indicated quite strongly that
more than 80 percent of your return vvill be
determined by actual asset allocation, rather
than whether you are in Fund A or Fund B's
large-cap portfolio. Each asset class has its
Make a difference right at work
with Earth Share, bringing the leading
environmental groups together.
How? Please visit our web site at
www.earthshare.org.
Earth Share
Owe environment. One simple t;wr to care for it.
This space has been provided by the Business JoumasI as a public service.
WESTCHESTER COUNTY BUSINESS lOURNAL
own distinct risk profile, each performing
differently in response to various market
conditions. Of course, the higher the risk, the
higher the potential reward.
Most advisers have done a
good job of allocating the
assets their client has in
the mutual fund portfolio he
holds with the adviser hut
they have ignored the client's
other assets.
Assets are also allocated among account
type, not just asset category. The modem
investor has many financial advisers sur-
rounding him, all offering advice on his
assets. He has a mortgage hroker, accoun-
tant, insurance adviser, lawyer, stock broker,
mutual fund adviser and, of course, the
all-knowing brotber-in-law who is "in the
business." What most people don't realize
is that while all these advisers may be very
knowledgeable in their respective field, they
are not coordinating their efforts with the
other advisers. What results is duplication
of efforts, gaps and waste. These prohlems
seriously limit a person's ability to reach his
true financial potential and protect his assets
along the way.
For instance, your accountant may be
telling you to contribute to your 401(k) to
reduce your taxahle income while your
mortgage broker is telling you to prepay
your mortgage to save on interest. On one
hand you are reducing your taxable income
to get a tax break, hut on the other hand
you are losing the potential of tax-deductible
mortgage interest. These are two contradic-
tory strategies. While hoth may make sense
when micro-analyzed, they most definitely
don't when analyzed on a macro-economic
hasis.
This contradiction in strategies seems to
run hand in hand with a failure to coordinate
asset allocation among various accounts.
Most advisers have done a good job of allo-
cating the assets their client has in the mutu-
al fund portfolio he holds with the adviser
but they have ignored the client's other
assets. They have not tciken into account the
fact that their client may have a significant
amount of equity in his bome. They have
not considered that their client has money
in cash-value life insurance. They have not
considered that their client has much of his
money tied up in his husiness. AD of these
considerations are what determine the over-
all allocation of a portfolio. All of a sudden,
that mutual fund allocation is off balance.
This tells us that we need to take three
steps hack and look at the big picture, ff we
malce the mistake of "micro" analyzing the
components of someone's financial world
instead of "macro" analyzing the whole, we
have just seriously handicapped the amount
of wealth that person will be cihle to generate
over his or her lifetime.
Once we start measuring the value of
a portfolio and the Vcdue of what it would
have grown to without these inefficien-
cies, the numbers really start to jump off
tbe page. When measuring these losses
we must take into accoimt the time value
of money. Losing a $20 bill today does not
simply mean a loss of 20 bucks. That is
only half the story. What is really lost is the
opportunity to make money on those $20.
The value of that Jackson is all relative to
how far down the road we want to look.
Assuming a conservative rate of return,
those $20 are worth $30 in five years, $43
in 10 years. For a 40-year-old person, that
number jumps to $137 or more in retire-
ment income.
When comhined with taxes and inflation,
tbis concept of "lost opportunity cost" forms
the three largest eroding factors of wealth
that we see in our practice. Often these fac-
tors are misdiagnosed, or not accounted for
in the planning process.
The moral of the story is to keep your
money coordinated and in your control.
Make sure you are not paying two people to
do the same thing — or worse — competing
with each other. Paying attention to both
the asset allocation among traditional asset
classes and the strategic allocation amount
accounts will he the key to maximizing your
assets for the long haul.
Anthony J. Domino Jr., is managing direc-
tor of Associated Benefit Consultants
L.L.C. in White Plains. Reach him at
adomino@401 kman. com.
MAY 29,2006
Turning denial
into dollars —
Continued from page 17
• To the extent possible, arrange to never
see the 10 percent to 15 percent you save.
This can be done through employer savings
plans, an IRA or other types of investment
and retirement accounts offering payroll
deductions.
• Maximizeyourcontributionshyknowing
and adhering to retirement plcin contribution
limits for 401(k), SIMPLE (qualified retirement
plan for small businesses), traditional
and Roth IRAs. Take full advantage of the
tax deductihility of funds deposited in an
employee-sponsored retirement plan and
contdhutions to IRAs where there is no
employer-sponsored retirement plan.
• As your income rises, your savings do
as well hecause your plan is to maintain a
constant savings percent.
• Supplement tax-deferred accounts with
additional purchases of stock, bonds and
cash-equivalent investments.
• Consider adjusting income-tax wdth-
holdings so you are able to make the
payments.
It is critical that the baby-boomer gen-
eration ramps up its rate of savings — for
their own benefit and the overall economic
health of our nation.
Bob Reby is president and chief executive
officer of Robert J. Reby & Company Inc.,
financial planning advisers in Danbury,
Conn. He is a registered representative
with Royal Alliance Associates Inc., mem-
ber NASD/SIPC. Reach him at rreby®
robertreby. com.
New careers —
Continued from page 17
of making money never existed, what
would you have done differeptly?
Pay.4o9e attention during the day to
v\iiat you love. These "loves" are dues
to your hidden desires. When you were
young, what did you dream of becoming?
Whatever you decide is worth pursu-
ing, breeik the pursuit down Into small,
manageable steps and explore them one
at a time. This process helps you move
closer to feeling satisfied with your life
in the present while you set the stage
for the future. A step-by-step approach
will let you see there are many different
ways to get to the same gocil.
Make a plan, create a map and chart
a course. Once you are aware of your
dreams, it's never too late tofindpractical,
fulfilling ways to act on them. And, you
may have a lot longer than you think.
Pamela D. Blair is a psychotherapist
with a private practice in Hawthorne,
and author of "The Next Fifty Years:
A Guide for Women at Midlife and
Beyond " Reach her at pambkar®aol
com. :