Jason Vanclef Discusses His Asset Class Diversification Model
Asset class diversification is an important principle. When assets are not properly diversified, a portfolio can find itself vulnerable to many financial pressures. Jason Vanclef, published author and financial advisor, explains why he believes asset class diversification is so crucial to success and offers tips for investors who want to make their portfolios potentially less volatile and more profitable.
What is an Asset Class?
Many investors may believe that their portfolios are adequately diversified if they own a variety of securities, from small-cap to mid-cap stocks, energy interests, blue-chip stocks, and index funds. However, asset class diversification goes beyond this and potentially includes options like real estate, private equity in businesses, corporate and real estate debt, infrastructure, bullion, and many more.
Jason Vanclef takes this more diverse allocation model with his clients and introduces another significant concept most investors have been conditioned to resent. The concept of taking away liquidity for a portion of the portfolio to try to mitigate volatility and human emotions. The “shoot yourself in the foot” syndrome when investments or the economic environment turns hostel and people panic, selling most assets in fire sales. The typical investor behavior of buying at the top in greed and selling at the bottom out of fear is a common result of emotional investing. Using investments which are not traded on the stock market for a portion of an investor’s portfolio has the effect of making it difficult to emotionally sell these parts quickly and potentially allowing that investment to ride out the rough patches.
How Should Asset Classes Be Balanced?
The optimal balance of asset classes depends on your goals and the number of years you want to plan for retirement. As with stocks, it is smart to take more risks when you have a long time to invest, and when you need to take the money out in a shorter time frame, you should take fewer risks and focus on preserving your assets.
Risk management is a crucial function of balancing asset classes. Asset allocation can be a challenging prospect, but financial advisors can help their clients position their money to match their goals.
Ideally, a portfolio should be balanced to withstand changing economic conditions. A goal should be for it to be resistant to pressure from different tax conditions, inflation, or deflation.
Government budgets, Federal Reserve interest rates, and general movements of the market can also be influential. The goal is to preserve and even potentially make money during challenging economic conditions.
The precise figures that govern the balance of asset classes are often shared only with the investment advisor and their individual clients, but there are some general principles that any investor can use to secure their wealth.
Conventional thinking suggests stocks are where most investors want to put their money because they have been told that is where the highest rate of return is compared to other forms of investment. Jason believes the temptation to put all of your money in stocks needs to be avoided at all costs. Stock markets do occasionally crash, and the damage such a crash could inflict on your portfolio could be drastic and worse, the time lost trying to make back those losses you can’t get back.
A non-emotional approach to investment is a must if you want to succeed in the market. Paying too much attention to short-term gains and losses can cause you to lose money in the market. It is better to be governed by the fundamentals of the market and to invest for the long haul.
Per Dalbar, a group that analyzes the market returns versus what the typical emotional investor actually earns, when these principles are applied, portfolios have maximized their potential. When investors spend too much time fine-tuning their portfolios and reacting to temporary changes, their rate of return drops significantly from the average return of the market.
The conventional wisdom about how much money should be kept in stocks has changed over the past few years. Where in the past people were taught to subtract their age from 100 and put that percentage in stocks, the figure has shifted to 110 or 120. This accounts for longer lifespans and retirement periods.
Vanclef tries to turn the conventional thinking on its head and points out the vast majority of very wealthy individual’s net worth’s did not come from the stock market but rather from illiquid, tangible investments such as real estate, private equity, and debt.
Real estate is his favorite area to invest in. He feels most investors when looking at their total net worth would realize most of it probably came from the equity in their house or rental properties and not from the 401k’s or IRA’s at work.
He believes buying real estate which is conservatively financed and generates real cash income can be a bulwark against the vagaries of the stock market.
Jason believes you also must preserve your investment in cash and other liquid investments. Many successful investors keep up to 20 percent of their assets in cash or other short term investment vehicles. Depending on where we are in the economic cycle, cash levels will fluctuate. For Instance, during market peaks like early 2020, building up significantly higher cash allocations can allow for taking advantage of opportunities when prices fall. During or after a market crash or recession, putting higher percentages of your capital to work at hopefully depressed prices can lead to potentially outsized gains. Thus, an investor will be almost fully invested after a recession with a smaller allocation to cash, maybe 5% or whatever is appropriate for short term liquidity needs. Money market accounts or short-term U.S. Treasury bonds are some of the ways for parking cash.
Education about Investment
Vanclef’s approach toward investment relies heavily on educating his clients about the best way to balance their holdings. “No one loves your money more than you do” is a common saying Vanclef has with his clients. He is reminding them that they need to stay informed and active in their own retirement plans. Just handing all the decisions to someone else and hoping for the best leads to miscommunications and disappointment.
Allocating Assets for Successful Living
When basic principles of asset allocation are followed, investors are potentially able to see more year-to-year success. Investment advisors like Jason Vanclef have more targeted information for their valued clients. His model of true asset class diversification written in his book, The WealthCode 2.0 – How the Rich Stay Rich in Good Times and Bad is available on Amazon or other fine booksellers and can be another source of financial education for investors.
Securities offered through American Trust Investment Services, Inc. (ATIS) Member FINRA/SIPC. Investment Advisory Services offered through Delta Investment Management, LLC.(DIM) ATIS and DIM are not affiliated entities. Vanclef Financial Group, Inc. (VFG) is not a broker/dealer or Registered Investment Advisor. VFG is not affiliated with either ATIS or DIM. Vanclef Financial Insurance Services: CA License #OF13092. Additional information can be found at www.brokercheck.com.