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A New Investment Strategy for Optimum Asset Allocation

Prudent Asset Allocation ("PAA") maximizes safety for spending needs while maximizing growth for all else

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HOW IT WORKS

Prudent Asset Allocation

Prudent Asset Allocation (“PAA”), addresses the challenge which has historically been determining what allocation will provide adequate protection with acceptable loss in return that is in the investors’ best interest.

The Benefits

Prudent Asset Allocation ("PAA") is a balance of Preservative and Growth components that is specific to investors current situation. It eliminates the concerns of "making ends meet" and of fears of market "ups and downs." The practice maximizes return on long term assets, while continuously adapting to changes in personal situation and investment markets. It features the ability to wait for market recovery before making withdrawals.

The Importance

Prudent Asset Allocation (“PAA”) is an overarching investment strategy that separates investors assets into two channels, the Preservative Component and the Growth Component. PAA manages the movement from one to the other in a way that maximizes the safety of the first channel and maximizes return in the second. In this way investors earn as much as is feasible without putting their wellbeing at risk.

 

The Difference

Prudent Asset Allocation (“PAA”), improves on the standard and does not seek an arbitrary allocation but instead protects the assets necessary to fund investor needs. These protected assets are independent of market performance. The assets to meet investors’ needs have maximum protection and all remaining assets take full advantage of long term market performance. The needs are calculated for a period sufficiently long to avoid the effect of market decline and recovery. 

 

A Best Interest Approach to Asset Allocation

Asset allocation has been practiced in an arbitrary way since the dawn of the Modern Era[1]. While thought to be beneficial, great improvements to current practices are possible. These improvements are critically important for fiduciaries and experts who have the duty to act in investors’ best interest with care, loyalty and diligence.

 

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THE PROOF

Asset Allocation Strategy Test

Adopting a new allocation strategy and abandoning the arbitrary practice is difficult to imagine so the following give perspective and are encouraged for use.

Worksheet

 

RESOURCES FOR FINANCIAL ADVISORS

Investor Guides to PAA

Detailed guides targeted to the needs of different investors to help them gain insight into how a Prudent Asset Allocation ("PAA") strategy could help them achieve the heretofore impossible dream of low risk with high returns.

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Making Your Retirement Funds Work for You

In this brief we demonstrate the most reliable method of using your retirement funds to continue to produce the maximum feasible returns while also making sure that there are always funds for living expenses, planned purchases, emergencies and other spending. 

At retirement, when the usual income is reduced or ceases entirely, that shortfall is covered by withdrawals from the Growth component. To avoid market risk, withdrawals begin five years before the funds are needed. 

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Capturing Your Fair Share of Stock Markets

In this brief we show the opportunity cost1 of failing to take advantage of what is known and instead, acting on what is feared. The result is that millions of investors get out of the market at the wrong times and for the wrong reasons.   

The PAA principles described allow investors to take advantage of what is known and overcome irrational fears that lead to underperformance. 

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Always Having Cash When You Need It

In this brief we examine the two real risks that investors face and the ways in which these real risks are mitigated by the design of PAA. The first is running out of funds and the second is needing funds during unfavorable market conditions. While the discussion of risks has a multitude of facets, they can all be reduced to these two real risks. By managing the real risks, investors are properly protected. 

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Bridging Those Market Valleys

Confidence in the securities markets is achieved by a clear understanding of what aspects and conditions merit confidence. The securities markets vary widely in the potential return, risks and the irrational relation between the two. It is therefore necessary to limit exposure to only the most predictable investments and the realistic threats.

This brief will limit its examination to investments with a proven history of reliability and address those risks that have a reasonable likelihood of repetition. 

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The Target Date Replacement

This brief is based on the belief that no one solution can always be in the best interest of everyone.

Although very few people will disagree with this belief, generic solutions still proliferate. The “one size fits all” solutions are popular not because they are best for the investor but because they are easy. The “one size fits all” solution is easy because it does not involve any understanding of the needs or issues that an individual faces or require any action to address those needs and issues.

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STANDING UP FOR INVESTORS

Lou Harvey is a Change-Maker

In this podcast episode, Lou Harvey, founder of DALBAR discusses what motivates him to continue wrestling with seemingly unsolvable problems. His interest has always been focused on understanding and protecting the highly individualized best interests of all investors.

Want to speak to an expert?

DALBAR's CEO, Lou Harvey, has been hailed for his contributions to elevating the level of excellence in the financial and regulatory industry.

With a 45-year history, DALBAR is recognized by industry and government as an independent third-party expert in the business of providing audits, evaluations, ratings and due diligence.