Asset Allocation: The key to the best result
Source: Dimensional Fund Advisors Portfolios from January 1975 to December 2006
Although investors spend most of their time worrying about which stock or bond to buy, many academic studies show that as much as 90 percent of the difference in portfolio performance is the result of asset allocation: the division of portfolios into different kinds of assets (Financial Analysts Journal of July/August 1986).
Designing a well-diversified portfolio with a good mix of bonds, large and small stocks, and international exposure is a key step toward improving an investor’s financial health. Many portfolios suffer because they are not sufficiently diversified and often are cluttered with a variety of investments accumulated haphazardly over the years.
By carefully constructing a portfolio, it is often possible to increase overall return while decreasing risk by diversifying among multiple asset classes. Proper asset allocation takes into account a family’s goals, resources, ages and tolerance for risk.
Keeping to this discipline and taking much of the emotion out of investing generally results in steadier and more impressive returns over the long term.
For example, consider a “standard portfolio” comprised of two asset classes: 60% S&P index complemented with 40% bonds. Compare this to a slightly more complex portfolio. Go to: Portfolio Composition.
Next >>>