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FINANCIAL Advisors Are Thumbs Down on Traditional Asset Allocations New factors, such as low inflation, undermine the traditional stock, bond and mutual fund splits. By Steve Tuckey T he latest survey on IRA owners shows that investors are following the typical rule of thumb for their allocations, but some advisors are giving the thumbs down on what they call an outdated, and potentially dangerous, investment model. Individual retirement accounts have for decades served as tools to help ease the fears for those who use their tax-deferral advantages, and more importantly, keep just the right allocation of equities, bonds and mixed target funds for optimal preservation and growth of capital. The Employee Benefits Research Institute (EBRI) recently published a study that concluded IRA investors act pretty much as you would expect, according to their age and income status. “Overall, they seem to follow the predictable pattern with less equity exposure as you get older, and when you get larger balances they have more diversification across the categories,” said Craig Copeland, EBRI senior research analyst. Those under age 45 were much more likely to use balanced funds than were older IRA owners, and those under age 35 with balances less than $25,000 had particularly higher allocations to balanced funds. “This shift follows the standard investing rule of thumb that individuals should reduce their allocation to assets with high variability in returns (equities) as they age,” Copeland noted. Sean Dowling, principal of The Dowling Group, said that traditional wisdom does not always stand the test of time. “The results seem consistent with 46 what we typically see from new clients, but I strongly disagree that the allocations are appropriate,” he said. “Simply put, the brokerage business has convinced the general public of a myth that bond allocations should increase as you age. Not only do I disagree, but I believe that this fallacy is dangerous. I think that both young and old investors put their ‘retirement’ lifestyle at risk by following these rules of thumb perpetuated by the brokerage industry to sell their mutual funds, annuities, etc.” Investment advisor and author Dean Bahniuk said that many have lost faith in traditional asset allocation models, citing the unimpressive five and 10 year performance of equity funds. “The millennial generation watched the baby boomers lose a lifetime of sav- InsuranceNewsNet Magazine » December 2012 ings in the dot com correction, credit crisis and housing crisis. There is not a lot of faith in equities right now,” he said. “But then again, history has demonstrated that this is when stocks explode” And bonds do not necessarily supply the answer. “Rates are at historic lows. Sooner or later rates will rise and bondholders will get crushed. And the ironic thing is the investor went to bonds for safety.” Copeland said that allocations can be linked primarily by type of IRA. The Roth version offers tax-free distribution with nondeductible contributions. In addition, there is no maximum age 70 requirement for withdrawal as there are in traditional IRAs funded by deductible contributions.

December 2012

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