Basic Truths About Asset Allocation

By William Reichenstein

In the late 1980s and early 1990s, two studies indicated that asset allocation accounted for more than 90% of the variability and performance of investment portfolios. While there is some debate as to whether asset allocation plays such a pivotal role in portfolio performance, there is little doubt that it is something worth paying attention to when building your portfolio.

The article Basic Truths About Asset Allocation: A Consensus View Among the Expertsoffers up general asset allocation guidelines for a “typical” investor, based on a consensus from investing experts.

Some of the key elements from the article include:

• Invest in broad asset mixes
• Avoid market timing
• The longer your investment time horizon, the more you should be weighted in stocks
• You should always have exposure to stocks, no matter your age
• Invest in what’s right for you

The major takeaway? How you allocate your portfolio between stocks, mutual funds and bonds may be more important than the choice of individual investments. Let that sink in for a moment. Many investors obsess over investment selection and don’t think twice about asset allocation. However, if you do this you are possibly making a serious investment mistake.

By AAII Staff

As investors, one of the most important statistics we monitor is the performance of our portfolio(s). Doing so tells us whether we are on track to meet our financial goals, or whether we need to change our strategy or modify our expectations.

Luckily, long gone are the days when we had to manually calculate the returns on our portfolio or even rely on spreadsheets. Today we can log into our brokerage accounts to get real-time performance data or we use websites or software to track our performance, although the statistics they provide can vary significantly.

Even though there are innumerable resources available that will tell us how our portfolios are doing, we still feel strongly that it is important to know “how the sausage is made” and understand the mechanics behind calculating portfolio returns.

This is where How to Calculate the Return on Your Portfolio can help. Reading the article will show you:

• The variables that impact a portfolio’s total return
• How large additions or withdrawals can impact the calculation of portfolio returns
• How to calculate your total return across multiple portfolios
• Guidelines to follow when calculating the return on your portfolio

While we don’t expect you to start manually calculating your portfolio returns after reading this article, it will give you a better understanding of what’s going on behind the scenes with the service you rely on to determine your portfolio’s performance.