Equifax

Finance Blog

Asset Allocation: Maximize Your Returns and Minimize Your Risk

Written by Dan Solin on September 28, 2010 in Retirement  |   No comments

Asset Allocation: Maximize Your Returns and Minimize Your Risk Few subjects in investing are more misunderstood than asset allocation. Brokers don’t like to talk about it. Instead, they entice their clients with stocks they believe will “take off” or fund managers they think are “hot.”…

Retirement allocations to maximize returns on investmentAsset Allocation: Maximize Your Returns and Minimize Your Risk

Few subjects in investing are more misunderstood than asset allocation. Brokers don’t like to talk about it. Instead, they entice their clients with stocks they believe will “take off” or fund managers they think are “hot.”

Asset allocation refers to the division of your portfolio between various asset classes, like stocks and bonds.

Maybe asset allocation is the stepchild of the investing world because it offers no promises of outsized returns. It doesn’t make for scintillating cocktail conversation. Have you ever heard someone bragging about their terrific asset allocation?

The lowly status of asset allocation is ironic. It’s critically important. More than 90 percent of the variability of a portfolio’s performance over time is due to asset allocation. This means that more than 90 percent of the movement of your portfolio from quarter to quarter is due to the market movement of the asset classes in which your portfolio is invested.

Asset allocation is far more important than stock picking or mutual fund selection, yet those subjects typically dominate the discussion between brokers and their clients. Has your broker ever called and asked to discuss your asset allocation?

Asset Allocation Guidelines

Now that you understand its importance, here are some guidelines for determining the right asset allocation for your investment objectives and tolerance for risk.

1. Take a short asset allocation questionnaire.

2. If you have less than five years before you will need 20 percent or more of your invested assets, you should have no exposure to stock market risk. As in zero.

3. If you have a seven-year time horizon, you can have up to 50 percent of your portfolio in stocks.

4. If you have a fifteen-year time horizon, you can have up to 100 percent in stocks.

5. If you fit above or below these time horizons, you will need to adjust your portfolio accordingly.

Asset allocation doesn’t remain stagnant. Life events (like health changes, divorce, and inheritance) can require a change in your asset allocation. It’s a good rule to revisit your asset allocation every year and change it if required.

Once you determine your asset allocation, you have made your most critical investment decision. However, you’re not done. You need to resist the entreaties of brokers and advisers who tell you they can beat the market by investing in actively managed mutual funds (where the fund manager attempts to beat a designated benchmark).

William F. Sharpe, a Nobel Prize–winning economist, wrote a classic paper entitled “The Arithmetic of Active Management.” It should be required reading for every investor. Here’s his conclusion: “After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar.”

The Smart Investing strategy for investors is clear: Once you have determined your asset allocation, limit your investments to a globally diversified portfolio of low-cost stock and bond index funds.

Congratulations! You have now maximized your returns and minimized your risk. Best of all, you didn’t fall victim to the false promises of a “market beating” broker or adviser.

Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, and The Smartest Retirement Book You’ll Ever Read. . His latest book is Timeless Investment Advice.

Watch Dan on YouTube.

Follow Dan Solin on Twitter.

Read More:

529 College Savings Plans Are Best For Saving For Your Grandchildren’s College Education
Bonds and the Bonds Market: A Basic Primer
The Volatility Index – Much Ado About Nothing
Annuities: The Good, The Bad, and The Ugly

No comments yet


Leave a Comment


Name :


Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.


Retirement Archive

Stay Informed Sign up for our FREE Equifax email Newsletter