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Apr 30, 2013

The Advisors Option 5: Asset Allocation

Tricks of the Trade: The myth/lie of asset allocation.

  • It used to be 20 different underlyings to be fully diversified. Now with increasing correlation, it is closer to 40.
  • Debunking asset allocation as a method of defense. The old style of asset allocation in no longer effective.
  • Absolutely nothing about options, hedging or volatility was discussed at the Morningstar Advisor Event last year.
  • You are not fully diversified in this market unless you have something that gives you volatility exposure and negative correlation, i.e. protective puts, collars, volatility instruments, etc.
  • "Hedging is too expensive!" The cost of the protection is mitigated, particularly if you manage the positions effectively.
  • Outperforming to the downside is still outperforming.
  • Defensive positions can still generate competitive returns.

The purpose of this conversation is not just to promote Swan, but also to show that incorporating options into you asset allocation is part of the fiduciary responsibility of any advisor in this marketplace.

Listener Mail: Tell us what you want to know:

  • Question from (Name withheld) - As an active financial manager coming to options for the first time, I'd like to know what the hosts consider to be the most effective options position for busy advisors? If I only have time to learn one, I'd like it to be the best.
  • Question from Tom Meadows, Pittsburgh, PA - What percentage of financial advisors and planners do you estimate currently use options?
  • Question from Allan Gregory, San Diego, CA - If options education for financial advisors is such a problem, why doesn't OIC or some other entity offer a certification course for planners and advisors?