We use cookies to provide you with a better experience. By continuing to browse the site you are agreeing to our use of cookies in accordance with our Cookie Policy.

logo
  • Engineers & Specifiers
  • Contractors & Installers
  • Wholesalers & Distributors
  • Sign In
  • Create Account
  • Sign Out
  • My Account
Free Subscription
  • Sign In
  • Create Account
  • Sign Out
  • My Account
  • PRODUCTS
    • Bath & Kitchen
    • Fire Protection
    • HVAC
    • Hydronics/Radiant
    • Plumbing
    • PVF
    • Tools
  • PROJECTS
    • Commercial
    • Green Building
    • MRO/Retrofit
    • Remodeling
    • Residential
  • HOW TO
    • Design
    • Fire Protection
    • Legal Matters
    • Management
  • BUSINESS
    • Buying Groups
    • Technology
    • Associations
  • CODES & STANDARDS
    • ANSI
    • ASHRAE
    • ASSE
    • Regulations
    • Green Building
    • IAPMO
    • ICC
    • NFPA
  • RESOURCES
    • Media Kit
    • Advertise
    • Contact Us
    • Classifieds
    • Digital Editions
    • Behind the Wall
    • Webinars
    • ASPE Live 2022
  • PODCASTS
  • DIGITAL EDITIONS
Home » Pie-eyed over pie charts

Pie-eyed over pie charts

July 9, 2015
Roger S. Balser
No Comments

If you’ve ever worked with a stockbroker or financial planner, you’ve most likely been subject to a barrage of fancy-looking pie charts. Asset allocation models have been displayed in this graphic format since the pie was first invented, it seems.

Pie charts are standard tools that one views when meeting with a stockbroker or financial planner. I like to call these folks “pie-charters” because their recommendations are usually all the same. It doesn’t matter which firm you’re working with, when you’re meeting with your financial planner or stockbroker they always recommend a blend of growth versus safety investments and fixed income versus stocks. Traditionally they'll recommend a 60% growth and 40% safety split. Now yours may be a 70% to 30% split, or an 80% to 20% or even a 50% to 50% split, depending on your age and/or risk tolerance. But mostly they recommend a 60% to 40% split.

In a traditional 60-40 pie chart portfolio, 60% is directed to growth investments and the other 40% to fixed income or other types of “safe” investments.

On the growth side of a normal pie chart allocation, the largest piece you’ll find is invested in large-cap growth stocks or mutual funds. Financial folks generally put a smaller percentage in things like mid-cap stocks or mutual funds, and then a smaller amount in small-cap stocks.

Finally the smallest slice is directed to international equities or emerging markets. Sometimes commodities or gold is also recommended, but not too often.

The “safe” side sometimes isn’t

The other side, or the “safe” side, is allocated to fixed income or bonds. Professionals will often stagger the bond portfolio between short-, medium- and long-term bonds. The rest will be in cash or a money market account.

So what could possibly be wrong with this conventional type of pie-chart portfolio?

Well, there are a lot of issues with this type of portfolio in my humble yet wise opinion. So let’s try and tackle a few of them.

First, for the past 15 years small-cap investments in general have been the best performers. On the flip side (because they've been the best performers), you’ve seen large-caps really lag. In fact, there was a period from 2000 to 2010 where the Standard and Poor’s 500 — the large-cap stocks — returned nothing.

If you were a large-cap, pie chart type of investor, your large-cap growth portfolio really didn’t do so well. And that was probably the bulk of your portfolio.

So on the growth side, as a pie chart investor you have some real issues to deal with. (This is living proof that investing is just not plug-and-play!)

Looking at the fixed income, or “safe” side, bonds are riskier than they’ve been in the last 30 years. Since the late 1980s, bonds have been a terrific investment vehicle. You earn your income and you usually had a little capital appreciation. This is because as interest rates go down bond prices go up. Now that interest rates are near zero, you’re probably looking at the reverse.

So individuals who own bonds are realizing significant capital depreciation in their accounts. Real losses. Having 20%, 30% or 40% of your portfolio in fixed income or “safe” investments can do real damage to your future.

Turning our sights to the 2008 meltdown, the worst market most of us have witnessed, the 60-40 portfolio that was supposed to protect you actually returned a net loss of 41%. Then it took fours year to get back to even.

Finally, the other problem is if you’re in your 50s and you take this pie chart approach. Keep in mind that you’ll most likely need this money in 15 to 20 years, so you’ll really need to step on the gas. This is the time you should be trying to make as much money as you can.

But isn’t that risky?

There is risk everywhere. There is risk now in “safe” bonds. And there is always risk in stocks.

As an investor you need to know that having a big chunk of your assets in “safe” fixed income areas does not necessarily make a ton of sense today.

The whole plug-and-play idea of fitting you into a pie chart scenario that’s based on a standard risk questionnaire is not the best approach in today’s market.

So why do stockbrokers and financial planners keep using the pie-chart method if it has flaws?

Well, because most stockbrokers and financial planners only have one playbook. They only know buy and hold. Then they re-allocate on a specific date usually three or six months down the road. They can’t tell you what asset classes or sector are doing well because, well, they just don’t know.

It is easier for them to just suggest sprinkling a little bit of your money into everything. Let’s spread it around. That’s akin to saying that if you buy enough lottery tickets you might hit a jackpot at some point.

So to avoid eating humble pie, investors need to know which asset classes and sectors are working well. That’s why the use of point-and-figure charts and relative strength gives you a distinct edge. Those charts clearly indicate which asset classes and sectors are favorable and unfavorable, and will improve your performance over the long haul. 

Wholesalers & Distributors
  • Related Articles

    Seven charts that explain California’s water prospects​

    A Fight Over Plastic Pipe in Michigan

    Cooney Brothers Raises over $10,000 for Cancer Research

  • Related Events

    2022 Water Demand Calculator Summit

Balser r 200 221
Roger Balser

The most wonderful time of the year

More from this author
You must login or register in order to post a comment.

Report Abusive Comment

Most Popular

  • NIBCO Expands Industry Presence with Acquisition of Matco-Norca

  • Stories From the Mechanical Room Podcast: The Math Never Lies ft. Taco Comfort Solutions' John Barba

  • Newly Released Scorecard Ranks States for Water Efficiency and Sustainability Policies

  • New 3M Docuseries Showcases Need for Diverse and Meaningful Trade Careers

Featured Video

Flow aide

JC Whitlam Flow Aide Biodegradable System Descaler Kit

Industry Events

  • 04Feb

    ASHRAE Winter Conference

    Atlanta, GA
  • 20Feb

    2023 WWETT Show

    Indianapolis , IN
  • 13Mar

    The Commonwealth Group 2023 Spring Conference

    San Antonio, TX
More Events

Subscribe to our newsletters & stay updated

Subscribe & Learn More

  • Tw02 2023 cover
    Learn More
  • Pe02 2023 cover
    Learn More
  • Phc02 2023 cover
    Learn More
  • Es 2022
    Learn More
Subscribe

More from PHCP Pros

  • Editorial Team
  • Home
  • Contact Us
  • About
  • Advertise

Follow Us

© 2023 All Rights Reserved

Design, CMS, Hosting & Web Development | ePublishing