Purpose Based Asset Allocation: The Working Capital Model

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Asset Allocation is an investment planning tool, not an investment strategy --- few investment professionals understand the distinction. Fewer still have discovered the power of "The Working Capital Model" (WCM). 

NOTE: WCM is the copyrighted intellectual property of Steven R Selengut, author of "The Brainwashing of the American Investor: The Book that Wall Street Does not Want YOU to Read". 

WCM facilitates long term, retirement income, investment planning by focusing on selection quality, issue diversification, and annual growth of both "base income" and invested capital. Neither market value nor the calendar year are perceived as relevant decision making criteria.

Base income = total dividends and interest produced by an investment portfolio.

Investing is a "grow wealth slowly" process, conducted in an uncertain environment  --- price volatility is understood, welcomed, and managed in a way that minimizes financial and economic risk.

Volatility creates opportunity.

WCM eliminates the need for performance comparisons with non portfolio-specific numbers and time periods, focusing instead on personal goals, objectives, and time frames.

It requires diversified portfolios of IGVSI equities, REITs, MLPs, and CEFs. Each security has a singular, growth or income purpose; "smart cash" is assigned to the growth purpose "bucket"; the income purpose "bucket" is kept fully invested at all times.

All investment grade securities fit neatly within one of these two classifications, based upon the primary purpose for their ownership. There are several key issues involved in successful WCM Asset Allocation:

• Understanding the purpose of each security
• Being true to the "cost based" asset allocation formula
• Focusing on "base income" growth, and the "compounding" impact of quick, reasonable profits

Most humans enter the investment process greed first, transforming a relatively simple wealth enhancing exercise into a mass of confusing products and philosophies. WCM is brilliant in its inherent simplicity.

The purpose of equity investments is growth through profit taking. Profits need not be large, but a disciplined target level must be inplemented without hesitation. Target profits must be realized immediately, so it is wise to house stock market investments in tax deferred quarters.

WCM works because it is an IGVSI  equity only model... fewer than 400 stocks, a score of ADRs, and perhaps a dozen each of MLPs and REITs meet the strict quality and income requirements of Market Cycle Investment Management. MCIM is the only 40 year plus investment style that employs WCM.

The income purpose bucket of WCM portfolios has evolved from individual fixed income securities and Unit Trust vehicles to a diversified collection of long operating (average over ten years) income Closed End Funds managed by a dozen or more institutional money managers.

These managed portfolios are significantly more "liquid" and income productive than the fixed income securities they contain. They may be held for long periods of time, but positions can be added to when prices fall and profits may be realized when prices rise... difficult at best with individual securities. 

WCM keeps investors purpose focused, and "risk minimized" in several ways:

• Growth purpose securities (equities) are IGVSI companies, boasting the lowest risk credentials offered by S & P... the highest quality companies on the planet
• Income purpose securities are experienced, multi-diversified, proven income producers that can be yield enhanced at lower prices and profit producers at higher prices... @ low cost.
• WCM portfolios (MCIM only) have disciplined purchase guidelines, profit taking targets, and diversification rules designed to reduce financial risk
• All base income and capital gains are reinvested using a "working capital" decision model, BUT "smart cash" is held only in the growth allocation bucket

Smart Cash is growth bucket allocated cash that is waiting for an appropriate investment opportunity... the product of base income and realized profits. Neither unrealized gains nor "total return" can compound one's income growth numbers.

Unlike Mutual Funds and ETFs, MCIM managers are not forced to buy equities at much too high prices. Cost based (working capital) asset allocation assures that the income bucket remains at full strength, while patience is exercised in finding suitably priced equity investments.

The Asset Allocation formula is the mission statement defining the long term structure of the portfolio. A 60% growth purpose, 40% income purpose, MCIM portfolio will likely outperform a more aggressive (higher risk) equity only portfolio over the course of a market cycle. It absolutely will produce and grow a much larger level of base income. 

Asset Allocation itself is often misused in an effort to superimpose a valid investment planning tool on speculative strategies that have no real merits of their own. For example, annual portfolio repositioning, market timing adjustments, and Asset Allocation Mutual Funds.

To be effective, Asset Allocation must be tended to with every investment decision... as it is using WCM. The Asset Allocation formula itself is sacred, and if constructed properly, should never be altered in any respect due to conditions in either equity or income markets.

Changes in the personal situation, goals, and objectives of the investor are the only issues that can be allowed into the Asset Allocation decision making process. It operates above the whims and cycles of the markets... both income and equity.

(For a tutorial on Income Investing, click here.)