Asset Allocation

The first and most critical question is the asset allocation decision. Historically, the higher the stock representation in a portfolio, the greater the return. Unfortunately, risk and reward always travel the same road together, resulting in price volatility. Actuaries have somewhat resolved the issue of asset allocation, noting that time horizons are typically quite long for both individual investors and plan sponsors. They also share a common goal: reasonable return without unreasonable risk.

Furthermore, the plan sponsor’s fiduciary responsibility mandates that they choose a prudent investment alternative. By 1998, approximately 60 percent of all private pension assets were invested in common stock. Unless directed otherwise, Beacon generally maintains a 50–65 percent equity guideline for taxable and non-taxable accounts. We feel this equity-to-debt ratio provides a reasonable balance of prudence and performance.

Diversification

We believe that concentration of assets builds wealth, and diversification maintains it. Our typical client portfolio has no single issue, at cost, that represents more than five percent of the portfolio. In addition, common stocks within a single industry do not exceed 20 percent, at cost, of the portfolio.