Fortune Watch

The Asset Allocation formula is the mission statement that defines the long term structure and nature of the portfolio. By simply stating, for example, that the portfolio is to be 70% invested in equities and 30% in fixed income, an investor has proven that: (1) he has analyzed his personal situation carefully and, (2) determined that this structure is most likely to achieve his long term goals.

Asset Allocation is often misused and abused in an effort to superimpose a valid investment planning tool on speculation strategies that have no real merits of their own. For example, “annual portfolio repositioning”, “market timing adjustments”, and shifting between Mutual Funds. To be effective, Asset Allocation must be implemented as an on-going process that is to be tended to with every investment decision.

The Asset Allocation Formula itself is sacred, and if constructed properly, should never be altered in any respect due to conditions in either equity or income markets. Changes in the personal situation, goals, and objectives of the investor are the only issues that can be allowed into the Asset Allocation decision making process. It operates above the whims and cycles of the markets — Income or Equity.

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Asset Allocation is an investment-planning tool, not an investment strategy — few investment professionals understand the distinction. Fewer still have discovered the power of The Working Capital Model. The problem that most investors have is that they use the wrong number to determine their Asset Allocation in the first place. Neither market value nor the calendar year should be relevant issues.

The only reason for a person to assume the risks associated with investing is the possibility of achieving a higher rate of return than is attainable in risk free savings depositories for their capital (money). Investing is a get rich slowly process, conducted in an uncertain environment — one that must be understood and managed in a way that minimizes the risks involved.

The Working Capital Model accomplishes this by eliminating the need for impersonal comparisons with arbitrary and unrelated numbers and time periods. It works best with portfolios that are diversified among individual securities that are at the same time of high quality and income producing.

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