Asset allocation determines more than 93% of the volatility of your return based on studies of the asset mix. Although volatility (ups and downs) may not equate directly to your actual return, they are correlated. More importantly, you have to understand these concepts of allocation and diversification. Your advisor, for example, has you in 80% US stocks and 20% International as an aggressive, long-term investor and he tells you that your portfolio is beating the S&P 500 by 2 percentage points.
If the US Stock market (as measured by the S&P 500) did, for example, 10% and you have 80% there, then that contributes (.80 times 10%) which equals to 8% of your return.
If International, on the other hand has done 20%, then that contributes (.20 times 20%) which equals to 4% of your return.
So...your total portfolio return is 12% and beats the S&P 500 by 2% - not by any miracle working stock-picking by your advisor but simply because of the asset allocation. Be careful to measure your total portfolio by the correct benchmark. In this case, you would compare your returns to 80% of the S&P 500 and 20% of your return to the MSCI EAFE index possibly. If, and I remind you that this is just an example, the S&P 500 index had done 10% and the MSCI EAFE had done 25%, then in reality, your portfolio under-performed.
Lesson: make sure you are comparing results against the proper benchmark and it almost universally is not going to be the S&P 500 if you have international and/or bonds in your mix.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.