Asset Allocation and the Three Bears

Executive Summary

One significant risk facing today’s investors is not market volatility, inflation, or even taxes. It is the risk of outliving their money by remaining overexposed to asset classes with low forward returns and high downside risk.

Traditional Strategic Asset Allocation (SAA) assumes long-term historical averages will prevail. Tactical Asset Allocation (TAA) attempts to outguess markets in the short run. Both approaches may face challenges in today’s valuation-distorted environments.

A third approach — Time-Varying Asset Allocation (TVAA) — is just right as it represents the middle ground. TVAA systematically adjusts portfolios based on medium-term (e.g., 10-year) return and risk forecasts, emphasizing valuation, probabilities, and discipline over prediction.

This paper integrates TVAA with a FORO (Fear of Running Out) mindset and a five-step investment process designed to support long-term objectives for retirement success.

The Three Bears of Asset Allocation

Strategic Asset Allocation — Too Cold

SAA anchors portfolios to static benchmarks such as the S&P 500 and broad bond indexes. While simple and familiar, it does not explicitly adjust to valuation extremes and assumes risk premiums are stable. When asset prices become stretched, SAA may increase exposure to risk when future returns are expected to be lower.

Tactical Asset Allocation — Too Hot

TAA relies on short-term forecasts, market timing, and economic predictions. Success requires being right and timely — repeatedly. Emotion, luck, and behavioral errors often influence outcomes.

Time-Varying Asset Allocation — Just Right

TVAA occupies the rational middle ground as it seeks to balance the limitations of purely static and short-term allocation methods. It:

• Uses forward-looking, valuation-aware forecasts

• Adjusts exposure gradually, not abruptly

• Emphasizes risk management, not prediction

• Treats asset allocation as a process over time, not a moment in time

TVAA is not market timing. It is designed as probabilistic risk management.

Today’s Greatest Retirement Risk

Ask a simple question: “How much would you invest in an asset class with a low-single-digit 10-year forecast — especially when the path to that outcome is unknowable and could include significant drawdowns?”

Yet this is exactly what many investors do today by maintaining large, benchmark-driven allocations to U.S. large-cap growth stocks dominated by a handful of mega-cap technology companies.

This is not a call.
This is not a bet.
This is a disciplined response to valuation risk.

FORO vs. FOMO

Successful retirement investing replaces FOMO (Fear of Missing Out) with FORO (Fear of Running Out). Your portfolio must generate enough real cash flow to last as long as you do. Emotion has no seat at the table.

The Wise Investor’s Formula: Calm × Realism × The Future = Success

The Five-Step Framework (Applied Today)

Step 1 — Asset Need

• Required real return (after inflation)

• Risk tolerance and patience

• Updated forecasts, not historical averages

• Consider lowering required accumulation via lifestyle and “Happiness Per Dollar” analysis

Step 2 — Asset Allocation

Historically has been a significant driver of outcomes.

• Favor assets with attractive risk/reward

• Combine assets with low correlations

• Diversification only works when assets truly zig and zag

Step 3 — Asset Capture

• ETFs over most active strategies for cost, tax, and time efficiency

• Be “active” where it matters: allocation, rebalancing, taxes, and planning

Step 4 — Asset Location

• Equities generally in taxable accounts

• Income-producing assets in tax-deferred accounts

• Highest expected return assets in Roth accounts — which may not be U.S. large-cap growth today

Step 5 — Asset Rebalancing

This is where TVAA lives.

• New forecasts

• New risks

• Sell outperformers

• Buy underperformers

• Harvest gains and losses

• Reduce risk when reward is scarce

Why Valuations Matter More Than Volatility

Volatility is a measure of risk. How much you can lose is the measure of risk.

Historically:

• High valuations → low future returns

• Low valuations → higher future returns

• Mean reversion is not precise, but it is persistent

When equity risk premiums compress and bond yields rise, blindly following equity-heavy benchmarks becomes hazardous.

Where Risk-Adjusted Opportunities May Exist

Without making predictions:

• Value over growth

• Smaller over mega-cap

• International over concentrated domestic exposure

• Short-to-intermediate high-quality fixed income over long duration

• Paying off high-interest debt as a risk-free return equivalent to the interest rate avoided.

Diversification across countries, factors, and income sources may reduce the probability of catastrophic loss.

Biases That Undermine Investors

• Recency bias: extrapolating recent winners

• Home-country bias: overconcentration in one economy

• Benchmark bias: comfort in losing money together

• Career risk: advisors hugging benchmarks

• Confirmation bias: ignoring inconvenient data

TVAA is intended to help address these biases through a structured process.

Market Timing vs. Risk Management

Historically, avoiding major losses has far greater compounding impact than capturing every upside year.

This is not all-in or all-out.
That would be sinful.

The logical response is measured, probabilistic shifts toward assets with more favorable forward risk/reward characteristics.

Conclusion

Being different is uncomfortable.
Being disciplined is rare.
Being probabilistic is powerful.

TVAA is not exciting.
FORO is not fashionable.
The tortoise is not flashy.

But history suggests that boring, valuation-aware discipline often wins the retirement race.

Stick to the script.
Tune out the noise.
Trust the process.

About the Author: Glenn Frank is Professor Emeritus and founding director of Bentley University’s Master’s in Financial Planning program. He has served on investment committees for over 30 years and teaches workshops on investing, retirement planning, and the advice industry. He is a partner at Frank & Flanagan and author of Your Encore: How to Balance Time, Money, and Happiness in Retirement.

Copyright

© 2025 Glenn Frank. All rights reserved.
This material is for educational purposes only and is not intended as personalized investment advice.

Important Disclosures & Forward-Looking Statements: This material is provided for informational and educational purposes only and does not constitute personalized investment advice, a recommendation to buy or sell any security, or a solicitation of any investment strategy. All investing involves risk, including the possible loss of principal. There can be no assurance that any investment strategy, including Time-Varying Asset Allocation (TVAA), will achieve its objectives or avoid losses. No strategy can guarantee success or protect against loss in all market environments. Statements regarding forecasts, expected returns, valuation relationships, risk premiums, probabilities of success, or future market conditions are forward-looking in nature. These statements are based on current assumptions, estimates, and market conditions, which are subject to change without notice. Actual results may differ materially from those expressed or implied. Historical relationships—such as the relationship between valuations and future returns—are not precise, may not persist, and should not be relied upon as guarantees of future outcomes. Markets may remain overvalued or undervalued for extended periods, and valuation-aware strategies may underperform traditional benchmarks for prolonged timeframes. Asset allocation and diversification do not ensure a profit or protect against loss. Certain asset classes referenced in this material—including value stocks, growth stocks, international securities, small-cap securities, and fixed income investments—carry distinct risks and may experience periods of significant underperformance relative to other asset classes. International investing involves additional risks, including currency fluctuations, political risk, and differing regulatory standards. Fixed income investments are subject to interest rate risk, credit risk, and inflation risk. References to tax-efficient asset location strategies are general in nature. Individual tax circumstances vary, and investors should consult their tax advisor regarding their specific situation. Investment decisions should be made based on an investor’s individual objectives, risk tolerance, financial circumstances, and time horizon. Readers are encouraged to consult with a qualified financial professional before implementing any strategy discussed herein. EverSource Wealth Advisors, LLC is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.