As we continue to matriculate through yet another fantastic season here in paradise, many retired investors are simply mesmerized by all things investment related with the “Trump Effect” still in full swing.

Often financial advisors assist with asset allocation while many investors are not yet to the stage of their investment decision making process whereby they understand the basic fundamentals. Discussing and researching asset allocation in the name of building and maintaining wealth may be a bit ahead of the learning curve for many retired investors.

Now is a good time to take a step back and discuss the fundamental concept of understanding the difference in “asset class” before we get to the point of allocating among the various assets. I other words, often a review of “asset class 101” creates a better understanding of what is happening inside the actual portfolio.

On the surface, there are several basic asset classes which may bring clarity to the average investor when it comes to understanding what they own, and more importantly, why they own it. The very base of the asset class pyramid consists of what many refer to as the “cash class”. This entails the use of money markets, bank CD’s and of course, simple cash deposits.

In order of risk reward, many agree that the next asset class would entail “debt instruments”. This reference refers to the bond market. Bonds are considered a complimentary asset class to most portfolios. Perhaps incorrectly, they also have been associated with safety. There is a degree of safety when held to maturity, however expect fluctuating values along the way to maturity.

The natural progression in asset class would be the “equity” class, or stocks. Again, this is a class that many feel confident in understanding, however, far too many do not understand the simple concept of diversification among various asset classes as far too many financial advisors have convinced far too many retired investors that diversification can be achieved with different categories of stocks. This is perhaps one of the biggest fallacies among the investing public. Although there may be numerous classes of stocks, they all enjoy the same characteristics in that they can and will lose value when the stock markets correct. Unfortunately, many have far too much exposure to the “equity class” as stocks comprise the majority of holdings.

The final major asset class which is certainly the least understood is what is referred to as the “alternative investment class”. The very name of this class tells the story of an asset class that can be a complimentary addition, or alternative, to traditional stocks and bonds. There are various incarnations of this particular class, however for most, there are a couple of examples which can and will compliment any portfolio. Over the last few decades, the Real Estate Investment Trusts have become popular with investors for their ability to offering an attractive income stream. Of course, like many asset classes, both the income and overall values can and will fluctuate.

Another much overlooked and misunderstood option within the alternative investment asset class is the use of managed futures. Yes, commodity trading has actually been around as long as stock trading, yet has a smaller footprint in the world of portfolio allocation. Certainly the ability to take advantage of the power and strength of managed futures to both reduce risk while at the same time increase returns makes this an ideal addition to most portfolios. The Nobel Prize winning research “Modern Portfolio Theory” makes a clear case for ownership.

Now we can begin to piece the puzzle together when it comes to using multiple asset classes to diversify any given portfolio. The variable here is to establish the proper weighting for each asset class based on the investors goals, objectives and risk tolerance.
The idea of diversification with various asset classes is based on the concept that each class has the ability to generate returns at any given time as opposed to expecting overall performance form a single class, such as stocks. Generating meaningful returns in any and all market conditions can certainly lead to the life of a SWAN, Sleep Well at Night.

William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or The opinions and observations stated above are those of the columnist.

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