In Greek mythology, Icarus and his father, Daedalus, were stranded in the Labyrinth of Crete. Icarus and Daedalus attempted to escape from Crete by constructing wings on their arms out of feathers and wax. Before lift-off, Daedalus warned Icarus to maintain balance during their flight between the sun and the sea to ensure they would make it home safely. He warned Icarus that if he flew too low, the dampness of the sea would clog his feathers, causing him to lose lift and drown. And if he flew too high, the heat of the sun would melt his wings. Icarus did not heed his father’s warning. Soaring too high in the sky, his wings melted, sending him crashing to the Earth.
This story and its principles can be directly applied to those planning their retirement.
Asset Allocation is the investment strategy that properly weights each investment class based on one’s specific needs. In this situation, we will compare asset allocation to “flying.” Just like in the story, in investing, we do not want to have too high of an allocation to stocks in our portfolio, nor do we want too little allocation to stocks; we need a balance to help ensure the safety of our investments.
Over-investing in the stock market may send your portfolio crashing due to market volatility. However, too little allocation to stocks may result in your portfolio drowning in inflation.
It is important to follow the advice of Daedalus when investing, to ensure you keep the appropriate allocation of stocks and bonds in your portfolio. In doing so, it should improve your chances of making a safe and successful journey to your final financial destination. Helping clients choose the proper asset allocation is one of the most important services that can be provided by a financial planner. In our opinion, determining the bond to stock allocation is critical to investor success. A study by Beebower, Brinson, and Hood confirmed this belief. Their study found that over time, more than ninety percent (91.5%) of portfolio return comes from asset allocation.
* SOURCE: Beebower Brinson and Hood. Determinants of Portfolio Performance, 1991.