Asset Allocation

The Flaharty Asset Management Asset Allocation Models take into consideration assumptions of future expected return and risk characteristics of markets. These models are constructed based on sound judgment. Our research allows us to collectively craft a process that puts our strategic asset allocation models in the best position to achieve risk and return success relative to each client’s distinct investment objective. Through our collective experience of studying capital markets for several decades, we have determined that one of the most important elements in creating our Flaharty Wealth Models, is the statistical premise of mean reversion, or in layman’s terms, price matters.

Mean reversion is the statistical calculation that cites that certain number series tend to gravitate towards their long-term average — for example, when the series displays above average numbers, mean reversion would suggest that one should expect lower numbers in order to pull the series back towards the average. We have observed that both expected risk and return are strongly influenced by mean reversion theory.

 

"After a lifetime of picking stocks, I have to admit that Bogle's arguments in favor of the index fund have me thinking of joining him rather than trying to beat him. Bogle's wisdom and common sense [are] indispensable...for anyone trying to figure out how to invest in this crazy stock market."

-Jim Cramer – CNBC, 2007

Many investment scholars suggest that capital markets are a “Random Walk”, which propose that since market results are so unpredictable, trying to estimate the direction and magnitude of the market is a fruitless endeavor. As a result, many suggest that since market returns are random, the best predictor of the expected future return of an investment is simply its average historical return. Thus, regardless of whether the stock market is in the middle of a speculative bubble or following a protracted bear market, the expected return of stocks would simply be the long-term average. Furthermore, the expected future return for bonds under the Random Walk theory would be the same whether bond yields were 2% or 8%.

 

Flaharty Asset Management respectfully disagrees. We do not believe that it is accurate that the price level of the market has no influence on future returns. After all, the only known investment strategy to work without fail is to “buy low, sell high”, which implicitly means that price does matter, both at the entry and exit points. Thus, the strategic asset allocation framework of Flaharty Asset Management's Asset Allocation Models is essentially built around a notion that reversion to the mean is a powerful investment force that serves as the starting point of our strategic asset allocation construction process.
 

Asset allocation does not ensure a profit or protect against a loss.