I read sometime ago about insured asset allocation: set a minimal amount of your portfolio value and do not allow it to drop below that amount in any circumstances.
Something along that line was done at the end of the last year by Ted and other retiree I know who completely quieted the stock market because could not afford losing money at their age.
What do you think about this asset allocation or other types of insuring your portfolio from loses? Did you see in the literature details how it works?
I understand that insured asset allocation is not a recommended way to invest, but nevertheless if you still want to stay in the market and at the same time want to protect your money from excessive loses you need to find a right approach to do that.
Comments
https://www.investopedia.com/investing/6-asset-allocation-strategies-work/
Each will have his / her own take on this. I get the general drift that the approach is designed to cut losses. But it runs contrary to everything I know and feel about investing. Would you sell your home if its assessed value fell below a certain level? How about the vacant lot in the neighborhood you bought for spec? Or the antique auto you own and admire?
When I invest in funds I’m investing in the underlying assets (companies, commodities, gold, infrastructure, secured debt, etc.). I expect these will vary in value over the years (as a home might). But if I believe it’s worthwhile owning those underlying assets, than why would I sell them just because their market value dropped?
I remain optimistic that over the longer term (10+ years) a well diversified portfolio that has exposure to many types of investments (read: not 100% invested in VFINX or TRBCX) will keep me at least on pace with inflation - and probably somewhat ahead of it. Generally, I’d rather own “things” than pieces of paper with $$ signs printed on them.
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@DavidV - I have not addressed the issue of age (which you mention). Your question seemed to be more about a specific allocation strategy. I’m aware 2 or 3 prominent board members mentioned during the past year that they were moving almost entirely to cash. The reasons seemed to be related primarily to age. IMHO that’s an entirely separate decision that everyone with the help of family and friends needs to make at some point. Call it an “allocation strategy” if you like. Whatever works.
(I’m not a qualified financial advisor.)
Rather than adding the complexity of portfolio insurance (the idea of which seems a bit dubious to me) why not simply reduce risk by reducing the equity holdings?
Insured Asset Allocation
“With an insured asset allocation strategy, you establish a base portfolio value under which the portfolio should not be allowed to drop. As long as the portfolio achieves a return above its base, you exercise active management – relying on analytical research, forecasts and judgment and experience to decide what securities to buy, hold and sell, with the aim of increasing the portfolio value as much as possible. If, however, the portfolio should ever drop to the base value, you invest in risk-free assets, such as Treasuries (especially T-bills) so that the base value becomes fixed. At such time, you would consult with your advisor on reallocating assets, perhaps even changing your investment strategy entirely.
“Insured asset allocation may be suitable for risk-averse investors who desire a certain level of active portfolio management but appreciate the security of establishing a guaranteed floor below which the portfolio is not allowed to decline. For example, an investor who wishes to establish a minimum standard of living during retirement might find an insured asset allocation strategy ideally suited to his or her management goals.”
Source: Investopedia https://www.investopedia.com/investing/6-asset-allocation-strategies-work/
Conceptually there's nothing wrong with these, if their risk reward profile is what you're looking for. The basic principal protected variant is essentially just a combo of a zero coupon bond that has a maturity value equal to your investment, and index options bought by whatever is left over after buying the zero.
For details, see Equity Linked Notes, an Introduction (Pay no attention to the fact that this was published by Lehman Bros.
The problem is more with the way these are sold. First, while these come in many forms, the one that's pushed is the highest cost one, the VA. Second and more generally, the fee institutions extract for the relatively simple bundling process is often too high.
Getting back to insured asset allocation - this appears to be an approach to asset allocation as others have described. Like @hank, I did a quick search. It seems hard to find "first tier" sites discussing this.
The little bit that I've seen seems to suggest that this strategy may lock you into an all cash portfolio. The closer your portfolio comes to your minimum acceptable value, the more you're supposed to shift into cash.
The example given here has a $1M and an $800K floor to protect. The portfolio value is thus $200K above the floor. Based on that "excess", a stock/cash allocation is calculated.
The closer you fall toward the floor, the smaller the excess is and thus the less you allocate to equity. This can continue until you get so close to your floor that you've got virtually everything in cash (which has grown all the way to $800K in the example). At this point you've got no equity, no way to dig yourself out of the hole. All you're guaranteed is that you won't fall further.
A variant of Zeno's paradox. You may never reach 100% cash, but you'll get so close that the difference (excess) won't really matter.