Editor's Outlook

When the markets are in an extended bear period there is a tendency to just keep on eye on the market and pay less attention to one’s actual holdings.

However, portfolios require regular attention, especially if you hold individual stocks. Your investment style and approach dictate the level of monitoring required for your holdings, but regular reviews help to ensure that your portfolio is properly situated to meet your long-term goals.

Allocation adjustments are often necessary as different asset classes perform better than others. There is a tendency for a successful stock or asset class to dominate a portfolio even though we know that eventually gravity will catch up with it.

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AAII’s Asset Allocation Survey highlights the significant changes that occur over time. Many members are familiar with our weekly Sentiment Survey, but we also have been tracking the broad asset allocation of our members’ portfolios since late 1987 (see figure). Members can participate in the survey by clicking on the Member Surveys link.

The results are tallied every month, and looking at the long-term variation is very revealing.

We started surveying members just after the crash of 1987; at the time they were committing just under half of their portfolios to stock. In the 1990s, however, the stock allocation steadily grew until it peaked at 77% in March of 2000. Both market action and investor decisions contributed to this rise. Over the last three years, the allocation to stocks has generally dropped while cash and bonds have increased.

We can’t look at the allocation chart and say that stocks will go up simply because cash has grown to historically high proportions. However, we can stress the importance of looking at your current allocation of assets and mix of securities to see if it is tailored to meet your long-term financial goals and objectives.

This issue features two articles that may help in this matter. First is a comparison of portfolio management programs in Wayne Thorp's Product Comparison article. All of the programs examined in the comparison go beyond basic recordkeeping and provide reports that examine the asset allocation of your portfolio.

Secondly, in his Feature article, Wayne Thorp examines how to optimize your mix of securities to reduce the expected risk of your portfolio. A stock portfolio will only be diversified if it is made up of stocks in different industries that do not all move in tandem. Wayne explores how to use the RiskGrades Web site to measure the diversification of your portfolio and make appropriate adjustments.