A lesson in asset allocation

Here's story about bad timing that doesn't end badly.

Let's say in 2007 you inherited some money. Equity markets were flying high and bond yields were also high (prices low). You wanted to put your funds to work. Lucky for you the advisor you found to implement your strategy focused on asset allocation, rather than simply plowing all your funds into stocks.

If you didn't listen to an asset allocation recommendation, but instead invested all the money in U.S. equities (which peaked in October 2007), today you would be 27 percent poorer (excluding dividends). If you were really lucky -- and 10-year U.S. government bonds were where you put all your funds -- your portfolio would be 37 percent higher.

But it's tough to be lucky all the time. How about prudent?

If you followed a balanced approach (50 percent stocks and 50 percent bonds), your stock portfolio would still be down, but your bond portfolio's improvement would have offset the equity market decline. Four years later, your portfolio would be about 5 percent higher than in late 2007.

So, following a balanced approach protected your assets. One of the things to love about asset allocation is that a timing decision isn't required.

Right now, that 50/50 portfolio from 2007 is closer to 35 percent stocks and 65 percent bonds because of market moves.

If your risk tolerance, income and liquidity needs, timing and long term requirements haven't changed -- then this isn't the most efficient portfolio for your needs. To get back to a portfolio that is appropriate for you would require a sale of bond holdings and a purchase of equities to get back to 50/50. That's a 'sell high and buy low' strategy without having to worry about valuation. Think about it.