The Importance of Asset Allocation

Whenever you speak to an investment professional the topic of asset allocation always comes up.

Why?

Because asset allocation is responsible for most of the returns that an investment portfolio gets.

U.S. News’ Mitch Tuchman explains:

Yale professors studied money managers to uncover the source of their portfolio performance. They found that 90 percent of the returns came from the markets where they invested. Less than 10 percent came from the individual stocks they bought, and the timing of buying and selling investments.

Asset allocation simply means how much of a portfolio is invested in various asset classes.  Asset classes can be as broadly defined as stocks, bonds and cash.  But professional money managers break these broad categories down much farther.

Stocks, for example can be subdivided into (partial listing):

  • Large Cap Domestic Equity
  • Mid Cap domestic Equity
  • Small Cap Domestic Equity
  • Large Cap International Equity
  • Small Cap International Equity
  • Emerging Markets Equity

Bonds can be subdivided into (partial listing):

  • Long Term US Government Bonds
  • Long Term Corporate Bonds
  • Intermediate Term Bonds
  • Short Term Bonds
  • Tax Free Bonds

These lists are not designed to be an exhaustive list of the investment classes (we have not even touched on commodities and real estate), but simply to provide a brief example of what we mean when we speak of “asset allocation.”  The investment choices facing investors today are staggering in their complexity.   Yet more and more people are going to depend on their investment assets to provide them with a comfortable retirement after they leave the work force.

If you’re interested in more information about portfolio construction, send us a note.

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