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One Pro’s Asset Allocation In 400 Words

Your Money: A guide to the right asset mix

How much of your portfolio should you invest in each asset class?

Debates have raged on this topic for decades, but one local money manager makes the case for roughly 40 percent in fixed income, 57.5 percent in what are called “risk” assets, and the remainder in cash – a conservative starting place, given where the markets are currently.Here is the explanation from Jonathan Smith, partner at DT Investment Partners L.L.C., of Chadds Ford:

When the stock market is progressing well, as in 2013, investors don’t appreciate the importance of splitting their eggs among different baskets. They may even feel that asset allocation is a hindrance and instead just ride the stock market rally.

But it usually takes a sharp fall in stocks – as a result of, say, the recession of 2008, the European Union debt crisis, or the debt-ceiling debates – to demonstrate that a diversified portfolio can prevent losses in a downturn. A decline in any one asset class is offset by another, Smith says.

But how much? DT Investments has a few different asset allocation models, but a conservative model allocates 57.5 percent to what are known as “risk-based” assets, stocks, commodities, real estate, high-yield debt, and 40 percent to fixed income, such as municipal and corporate bonds. The rest can be held as cash.

Within the “risky” assets, DT Investments allocates 20 percent to large-cap stocks, 10 percent to mid-cap stocks, 4.5 percent to small cap, 4.5 percent to international stocks, and 3.5 percent to emerging market stocks; 6.5 percent is allocated to high-yield debt, 5 percent to real estate and the remainder in, say, gold.

“We use a lot of low-cost ETFs (exchange-traded funds) like SPY (the Standard and Poor’s 500 fund ETFS) and iShares to get exposure,” Smith said.

Smith was formerly the chief investment officer for fixed income at Haverford Trust, and he and three partners started DT Investments five years ago to service the $250,000 and up crowd of investors, whom he says aren’t properly served by the brokerage community. Currently DT manages about $600 million in assets.

“ETFs are low-cost, tax-efficient, and they track the asset classes closely,” he explained, adding that they try to buy individual municipal bonds rather than bond funds when appropriate. “Individual bonds enable the investor to better control against the risk of rising interest rates and falling bond prices.”


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