Asset Allocation: Why Style Diversification Makes Sense

If you are one of the many Americans who believe your best investment strategy is to buy low and sell high, you may want to explore the merits of asset allocation. Studies of some of America’s major pension funds have shown that an asset allocation policy is the major determinant of portfolio performance.

As the enclosed illustration “Alternating Leadership: Why Style Diversification Makes Sense” demonstrates, asset class winners and losers tend to change frequently, and in some cases, reverse completely from year to year. Although no investment strategy can guarantee success, a properly allocated portfolio is more likely to participate in positive investment trends while at the same time reducing volatility when the investment climate changes.

The asset weightings in your portfolio will depend on your individual situation and financial objectives. As your circumstances change over time, your financial advisor can adjust the weightings in your portfolio to reflect your goals. For example, in your earlier investment years, you will probably want a larger portion of your assets invested in stocks, for long-term growth. Although past performance cannot guarantee future results, equities have historically outperformed other investment classes. As you approach retirement age and start investing more conservatively, you may want to shift more of your assets into less volatile investments, such as fixed income instruments.

If you would like to learn more about asset allocation, and how it might benefit you, contact me today at (310) 866-8976 or via my website at http://www.benlawler.com

1. When I was in my 20s, I had invested in an aggressive portfolio with CIBC. It was one of those managed funds that rebalance your portfolio for you. Well, it was heavily weighted in equities and did very poorly.

2. John C. Bogle (of Vanguard fame) suggests that a person have their age in fixed income.

3. Just finished reading “Protect Your Nest Egg” and the authors suggest 70 equity/30 fixed income should be the upper scale for aggressive investors. In this book, they look back at the last 15 years, and the best performing asset class was — bonds! Go figure.

4. Last year, I had read an article that pension funds tend to use a 60/40 - 70/30 split equity/fixed income.

Any reason I picked this allocation? Probably because I seem to see that allocation a lot in my readings. Also, since I am fairly new to DIY investing (just over a year now), it is safer as I have the fixed income to prop me up.