Understanding Asset Allocation Funds

James Picerno submits: If you could only make one decision in your investment strategy, what would it be? Would you concentrate on picking the best securities? The best ETFs or mutual funds? Would you focus exclusively on trying to time your asset allocation/rebalancing choices? Or maybe you'd spend a lot of time deciding if Asian stocks would beat European equities in the foreseeable future. Or how about managing the risk, however defined, like a hawk?

James Picerno submits: SmartMoney asks: Is your index fund broken? Good question, although here’s a better one: Is your management of asset allocation broken?

James Picerno submits: SmartMoney asks: Is your index fund broken? Good question, although here’s a better one: Is your management of asset allocation broken?

Morningstar submits: By Michael Rawson, CFA With the surging popularity of exchange-traded funds, many investors feel that if they don't own ETFs, they must be missing out. Not so.

MyPlanIQ submits:We have already examined the Morningstar 401K plan. We explained why it is a model of plan creation – providing a manageable number of funds with broad asset class exposure that enables portfolios that can deliver solid returns. We also provided an ETF clone which enabled portfolios that underperformed the original. Performance chart (as of Feb 25, 2011)click to enlarge

Over the next few weeks investors will be focused on how best to make their retirement savings grow. The solution for many will once again revolve around plowing their annual contribution into high-cost, underachieving mutual funds, which have been the go-to investment vehicle for Canadians for years. It’s a tough cycle to break, but one that investors should consider in favour of many other more attractive opportunities if they want to make the most of their investments.

James Picerno submits: The concept of a world allocation fund is a good one, although the “pickings are slim, so consider building your own,” Morningstar advises. Even if the menu was better, the case for designing and managing your own multi-asset class fund is still compelling. One reason is cost. You can probably build your own asset allocation strategy for less if you do it yourself.

James Picerno submits: Moshe Milevsky, a professor at York University, recommends thinking strategically about your “personal beta” for managing risk. That begins by evaluating your human capital, he advises in today's Wall Street Journal.