Core Investing Beliefs Part 1

We have 2 primary investment beliefs:

1)   That asset allocation is the most important decision in investment management.

2)   That changing financial markets require continuous monitoring and tactical flexibility.

This post focuses on asset allocation and we’ll address the second core belief in the next post.

Asset Allocation is simply the term we use in the financial industry to describe how your money is invested in all of the various investment options available, and in what proportion.  For example, if you have a financial advisor making the asset allocation decisions for you, they are deciding how much you should be investing in US Large company stocks, how much in bonds, international stocks, etc.

An important study by two Nobel Prize winning researchers highlights the importance of asset allocation in investment returns.  They found that over 90% of the variance in an investment portfolio is determined by how the assets are allocated.  Other factors such as stock selection and timing, while still important to consider, only represent a small portion of an investor’s return. 

For example, back in 1999 when the stock market was up over 50%, it didn’t matter if you owned Microsoft, General Electric, or IBM, you still made a lot of money.  But, in the crash of 2000/2001, owners of those investments lost money while even a mediocre bond fund had a positive return.  So, rather than spending the majority of your time deciding between two similar stock investments, it is much more important to figure out whether you should invest 30% or 60% of your portfolio in stocks (or any stocks at all for that matter).

We help our clients with these important asset allocation decisions and closely monitor and adjust their asset allocation as the financial markets change.