By Tom Bradley

In my last posting, I talked about the questions that money managers should be asking. I focused on three – inflation, the next market leaders and valuation.

There is an additional question that individual investors (and their advisors) should be asking.

Is there a reason my portfolio should be significantly different than its long-term asset mix?

The up and downs of the last couple of years have left many people with asset mixes that are far different from what their plan calls for. Chris, Scott and I have certainly found a disproportionate number of investors holding over-sized cash positions, even though their objectives and time frame call for a large commitment to long-term assets (i.e. bonds, stocks, real estate).

I can’t make a case for such a divergence. A long-term asset mix represents a person’s best guess as to what type of portfolio is appropriate to meet her/his objectives. For investors to deviate significantly from the target mix, they need to have a contrarian view that carries with it heaps of conviction and confidence.

As regular readers know, last fall I found myself holding such a view - “prepare for the other side of the valley”...“this isn’t the RRSP season to miss”. Pounding the table on such a topic is a rare occurrence for a market-timing atheist like me, but I just felt that markets were significantly out of whack.

Today, economic and company forecasts are conservative and the apocalyptic scenarios of last year are no longer realistic (all of which is good for investors). Valuations are at more normal levels after the market rebound. And while the problems and opportunities ahead still point to a wider range of possible market outcomes, I don’t think we’re at either extreme on the reward/risk continuum.

Investors have a plan for a reason. To be significantly out of line with that plan, they need to have good answers to the right questions.