8/8/2019 Article- Maximize Your Assets for the Long Term

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18 WESTCHESTER COUNTY BUSINESS lOURNAL MAY 29 ,

M axiinize your a s s e t s for the long term

Domino Jr.theory of efficient

By ANTHONY J. DOMINO JR.Balance is afunny word. It canimply somethingthat is in the lurchor unstable, or well

rounded and diversi-fied. In the world ofinvesting assets itis the latter defini-tion that seems tofit hest. Since HarryMarkowitz offered hismarkets, and subsequent economists prof-fered the theories of asset allocation andmodem portfolio theory, the concept of hal-ance has heen the dominant and most suc-cessful app roach to profitable investing.In general, assets are bunched withinbroad categories (stocks, bonds, cash, realestate, etc). In turn, each category is refinedeven further (subsets of stock include smallcap, mid cap, large cap, international, etc).Quite simply, asset allocation is the processof determining the mo st efficient allocation ofyour portfolio among these classes. The twomost relevant factors are your risk toleranceand the time horizon of your investment.like most qucintitative cinalyses, therecan be only one "winner" among assetclasses. In any given economic cycle, it isquite safe to say the most recent top per-former will most likely be tbe laggard downthe road. Thus, spreading your investmentamong asset classes will be the most assuredway to maximize consistent overall return.Studies have indicated quite strongly thatmore than 80 percent of your return vvill bedetermined by actual asset allocation, ratherthan whether you are in Fund A or Fund B'slarge-cap portfolio. Each asset class has its

own distinct risk profile, each performingdifferently in response to various marketconditions. Of course, the higher th e risk, thehigher the potential rewar d.

M o s t a d v is e r s h a v e d o n e ag o o d j o b o f a l lo c a t i n g t h ea s s e t s t h e i r c l i e n t h a s i nt h e m u t u a l fu n d p o r t fo l io h eh o l d s w i t h th e a d v i s e r h u tt h e y h a v e i g n o r e d th e c l ie n t ' so t h e r a s s e t s .Assets are also allocated among accounttype, not just asset category. The modeminvestor has many financial advisers sur-rounding him, all offering advice on his

assets. He has a mortgage hroker, accoun-tant, insu rance adviser, lawyer, stock broker,mutual fund adviser and, of course, theall-knowing brotber-in-law who is "in thebusiness." What most people don't realizeis that while all these advisers may be veryknowledgeable in their respective field, theyare not coordinating their efforts with theother advisers. What results is duplicationof efforts, gaps and waste. These prohlemsseriously limit a person's ability to reach histrue financial potential and protect his assetsalong the way.For instance, your accountant may betelling you to contribute to your 401(k) toreduce your taxahle income while your

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mortgage broker is telling you to prepayyour mortgage to save on interest. On onehand you a re reducing your taxable incometo get a tax break, hut on the other handyou are losing the potential of tax-deductiblemortgage interest. These are two contradic-tory strategies. While hoth may make sensewhen micro-analyzed, they most definitelydon't when analyzed on a macro-economichasis.This contradiction in strategies seems torun hand in hand with a failure to coordinateasset 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 adviserbut they have ignored the client's otherassets. They have not tciken into account thefact that their client may have a significantamount of equity in his bome. They havenot considered that their client has moneyin cash-value life insurance. They have notconsidered that their client has much of hismoney tied up in his husiness. AD of theseconsiderations are w hat determine the over-all allocation of a portfolio. All of a su dden,that mutual fund allocation is off balance.This tells us that we need to take threesteps hack and look at the big picture, ff wemalce the mistake of "micro" analyzing thecomponents of someone's financial worldinstead of "macro" analyzing the whole, wehave just seriously handicapped the amountof wealth th at perso n will be cihle to g enera teover his or he r lifetime.Once we start measuring the value ofa portfolio and the Vcdue of what it wouldhave grown to without these inefficien-cies, the numbers really start to jump offtbe page. When measuring these losseswe must take into accoimt the time valueof money. Losing a $20 bill today does notsimply mean a loss of 20 bucks. That isonly half the story. What is really lost is theopportunity to make money on those $20.The value of that Jackson is all relative tohow far down the road we want to look.Assuming a conservative rate of return,those $20 are worth $30 in five years, $43in 10 years. For a 40-year-old person, thatnumber jumps to $137 or more in ret ire-ment income.When comhined with taxes and inflation,tbis concept of "lost opportunity cost" formsthe three largest eroding factors of wealththat we see in our practice. Often these fac-tors are misdiagnosed, or not accounted forin the planning process.The moral of the story is to keep yourmoney coordinated and in your control.Make sure you are not paying two people todo the same thing or worse competingwith each other. Paying attention to boththe asset allocation among traditional assetclasses and the strategic allocation amountaccounts will he the key to maximizing yourassets for the long haul.Anthony J. Domino Jr., is managing direc-tor of Associated Benefit ConsultantsL.L.C. in White Plains. Reach him atadomino@401 kman. com.

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To the extent possible, arrange to nesee the 10 percent to 15 percent you sThis can be done through employer savplans, an IRA or other types of investmand retirement accounts offering paydeductions. Maximizeyourcontributionshyknowand adhering to retirement plcin contribulimits for 401(k), SIMPLE (qualified re tiremplan for small businesses), traditiand Roth IRAs. Take full advantage oftax deductihility of funds deposited inemployee-sponsored retirement plan contdhutions to IRAs where there isemployer-sponsored retirement plan. As your income rises, your savingsas well hecause your plan is to maintaconstant savings percent. Supplement tax-deferred accounts wadditional purchases of stock, bonds cash-equivalent investments. Consider adjusting income-tax wholdings so you are able to make payments.It is critical that the baby-boomer geration ramps up its rate of savings their own benefit and the overall econohealth of our nation.Bob Reby is president and chief execuofficer of Robert J. Reby & Company Ifinancial planning advisers in DanbConn. He is a registered representawith Royal Alliance Associates Inc., mber NASD/SIPC. Reach him at rrebrobertreby. com.

New careers C o n t i n u e d f ro m p a g e 1 7of making money never existed, whwould you have done differeptly?Pay.4o9e attention during the day v\iiat you love. These "loves" are duto your hidden desires. When you weyoung, what did you dream of becominWhatever you decide is worth pursuing, breeik the pursuit down Into smamanageable steps and explore them oat a time. This process helps you mocloser to feeling satisfied with your liin the present while you set the stagfor the future. A step-by-step approacwill let you see there ar e man y differeways to get to the same gocil.Make a plan, create a m ap and chaa course. Once you are aware of yodreams, it's never too late tofindpracticfulfilling ways to act on them. And, yomay have a lot longer than you think.Pamela D. Blair is a psychotherapiwith a private practice in H awthornand author of "The Next Fifty YearA G uide for Women at Midlife anBeyond " Reach her at pambka raocom. :

8/8/2019 Article- Maximize Your Assets for the Long Term

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