Rethinking Asset Allocation
By Hal Brill
The crucial role of asset allocation and diversification in conventional investment theory presumes that owning a range of financial instruments (stocks, bonds, CDs, etc.), as well as real estate, is the most prudent path to long-term financial security. For much of the 20th century, conventional wisdom (and historic results) held that the market would reliably rise by 7-10% per year. But starting with the dot-com boom, the good times of soaring stock prices have been followed by the bursting of bubbles. Adding insult to injury for those with well-diversified portfolios, stocks were not alone in this—real estate crashed, bonds gyrated, and interest rates sank to near-zero.
Market volatility can be endured if there are long-term gains, but this hasn’t been the case thus far in the 21st century. From its dot-com peak on March 24, 2000 through April 30, 2013 (a time when headlines were bleating about the markets hitting new highs), the puny gains of the S&P 500 over that period were not enough for investors to break even when inflation is factored in. What has been called “The Lost Decade” for investors (the years 2000-2009 marked the first decade since the Great Depression that investors lost money over 10 years) has stretched to 13 years. Let’s see. . . virtually no overall return, amidst hair-raising volatility, infused with unending tales of corruption. Perhaps it IS time to think about some new strategies.
Total Asset Allocation—which we’re developing as part of our new book—expands the concept of diversification by drawing from three broad classes of assets: personal, financial, and tangible. By climbing out of the box that confines investors to mainstream financial offerings, you’ll discover a big world beyond Wall Street that is much more diverse and interesting, less volatile, and maybe even fun! By moving beyond money alone, you will come to see that the ways you invest your time and energy on a daily basis can be integrated with your financial decisions so that they are all working towards the same goals. So let’s take a brief look at what’s included in each of these asset classes.
Financial assets are the familiar currency of the realm that we’re used to calling “investments.” Your financial assets may include corporate stocks, debt instruments (i.e. bonds) that loan money to governments or corporations, or savings and checking accounts, along with any number of today’s more complex, or, shall we say, “creative” investment instruments, such as derivatives, repackaged loans, etc. Vehicles such as mutual funds and now ETF’s—exchange traded funds—are designed to help investors diversify among these assets.
Real or tangible assets are the “stuff” that we own or have access to. Most important are the practical aspects of daily life on which your survival and happiness depend: food, water, energy, land, buildings, transportation, and now, technology. It’s easy to overlook this realm when thinking of our investments, especially those that are not “liquid,” or readily re-sold. While our homes and property are commonly considered to be “investments,” because of their potential to gain value, this is the exception rather than the rule among our tangible assets. Once we’ve traded our time and energy or our money for anything physical—whether we hold it personally, like a box of cereal, or collectively, like a shared summer cabin—it becomes one of our tangible assets. Our choices about which, and how many, tangible assets to invest in has a huge impact on the world, and in many ways, is at the center of our economic lives.
Yet our tangible assets extend beyond the stuff we have in our houses and basements, which mostly reflects our purchasing choices in the market economy. On a larger scale, you may decide to convert some of your financial assets into tangible assets that benefit the broader community, while adding to your own sense of security. This could include things like habitat conservation projects, efforts to keep water rights with the land rather than being sold to distant cities, or investments in local food systems (from membership in a community-supported farm to conserving agricultural land for future generations of farmers). Ultimately, a healthy, functioning ecosystem is our most fundamental tangible asset, one that we all hold in common.
Personal and social assets refer to the time and energy we put toward taking care of ourselves – mind, body and soul – as well as to nurturing the web of social relationships that define us: partner, family, neighborhood, church, community, culture, bioregion, social networks, country, and even the planet. This is the “asset class” that you’ve probably been least likely to see as part of your investment choices, though it is quite possible that this is the one you are most actively engaged in – that is, investing in! – on a regular basis.
Our social and personal relationships are an essential kind of wealth that can’t be ignored; they require dedicated investment of time and energy in order to reap the human returns that we each need in our lives. We all have many examples in our personal lives of the ways that friends, family, and professional, recreational or faith networks have carried us through our times of greatest need. In the face of the complexity and uncertainty that increasingly underlie our sense of the future, these social assets are likely to be the most stable and valuable form of “investment” that most of us hold.
Our forthcoming book makes the case that in today’s complex and uncertain world, replete with economic, environmental, and social stresses, it makes sense to reach beyond the limitations of financial diversification to create a more resilient portfolio using all of the asset types that we have available. See Christopher’s article (following page) for a first take on how we’ll be guiding you to think about the risks and returns of these other asset classes as you cultivate your own “Total Asset Allocation” in ways that make sense in your life.
This piece first appeared in the Summer 2013 edition of the Natural Investment News
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