Structure, or asset mix, determines most of the performance in a diversified portfolio. Investors choose asset classes to play different roles in a portfolio, and their appetite for risk guides their asset allocation.
Capital markets are composed of many classes of securities, including stocks and bonds, both domestic and international. A group of securities with shared economic traits is commonly referred to as an asset class. There are several asset classes, all with average price movements that are distinct from one another. Investors can benefit by combining the different asset classes in a structured portfolio.
A full range of asset classes includes small and large stocks, domestic and international, value and growth, emerging market countries, global bonds, real estate, and even municipal bonds. Because the asset classes play different roles in a portfolio, the whole is often greater than the sum of its parts. Investors have the ability to achieve greater expected returns with less price fluctuation and more consistency than they would in a less comprehensive approach.
However, because no two investors are alike, there is no single "optimal" asset allocation. Each investor has his or her own risk tolerances, goals, and life circumstances that dictate the weightings of core and asset class portfolios. You should consult your financial advisor or plan administrator to help you determine an appropriate mix. In general, the greater the proportion of stocks a portfolio holds, especially small cap and value stocks, the more "aggressive" is its risk and the greater is its expected return.
A full range of asset classes includes small and large stocks, domestic and international, value and growth, emerging market countries, global bonds, real estate, and even municipal bonds. Because the asset classes play different roles in a portfolio, the whole is often greater than the sum of its parts. Investors have the ability to achieve greater expected returns with less price fluctuation and more consistency than they would in a less comprehensive approach.
However, because no two investors are alike, there is no single "optimal" asset allocation. Each investor has his or her own risk tolerances, goals, and life circumstances that dictate the weightings of core and asset class portfolios. You should consult your financial advisor or plan administrator to help you determine an appropriate mix. In general, the greater the proportion of stocks a portfolio holds, especially small cap and value stocks, the more "aggressive" is its risk and the greater is its expected return.
A Structured Approach to Asset Allocation
Hypothetical Portfolio Annualized Returns
Hypothetical Portfolio Annualized Returns
Annual data in USD: 1988-2010, rebalanced monthly.
MSCI data copyright MSCI 2010, all rights reserved. MSCI Indices are gross-dividend. Global Value Stocks: 1994-present: simulated by Dimensional from Bloomberg securities data. 1975-1993: data provided by Fama/French. Global Small Cap Stocks: 1994-present: simulated by Dimensional from Bloomberg securities data. July 1981-December 1983: Dimensional US Small Cap Index and Dimensional International Small Cap Index combined using StyleResearch Small Portfolio Weights. 1970-June1980: 50% Dimensional US Small Cap Index, 50% Dimensional International Small Cap Index.
MSCI data copyright MSCI 2010, all rights reserved. MSCI Indices are gross-dividend. Global Value Stocks: 1994-present: simulated by Dimensional from Bloomberg securities data. 1975-1993: data provided by Fama/French. Global Small Cap Stocks: 1994-present: simulated by Dimensional from Bloomberg securities data. July 1981-December 1983: Dimensional US Small Cap Index and Dimensional International Small Cap Index combined using StyleResearch Small Portfolio Weights. 1970-June1980: 50% Dimensional US Small Cap Index, 50% Dimensional International Small Cap Index.
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