Ample research suggests asset allocation strategy—the mix of stocks, bonds, cash and other securities you own—is the most important investment decision you make. Securities selection—stock picking—pales in comparison. Market timing, too, isn’t as significant. While costs matter, they aren’t nearly as important as asset allocation. We believe roughly 70% of longer-term portfolio return is attributable to asset allocation strategy alone.
Consider Exhibit 1, which shows the long-term historical return of various assets.
Exhibit 1: Long-Term Return of Assets, Annualized
Source: FactSet, Bloomberg, L.P., Global Financial Data, Inc., as of 2/25/2014. The comparative results could be different if the same time periods were used for all categories, however, different periods were used due to the lack of reliable data for certain asset types. For full descriptions of the indexes used, please contact Fisher Investments. Past performance is no guarantee of future returns.
The asset allocation strategy you choose should account for what the asset classes’ typical long-term returns. For example, if your goals and needs require long-term growth resembling equities’ 9% to 10% annualized returns, it isn’t reasonable to invest 50% of your portfolio in Treasury bonds. The likelihood stock selection offsets the lower-returning asset class is low. Similarly, if you absolutely cannot stomach stocks’ volatility, it isn’t reasonable to expect long-term annualized returns of 9% - 10%.
In every asset allocation strategy, there are tradeoffs. More equities will likely mean higher longer-term returns, but also greater near-term volatility. More bonds will likely mean less volatility, but more sensitivity to interest rates and inflation. Cash, which isn’t listed here, has no volatility but a lot of inflation risk. We believe crafting the right asset allocation for you requires taking the time to educate you on these tradeoffs and understanding how they may help or hinder the chances you reach your investment goals and needs.
Tailoring your asset allocation strategy to your goals and needs is crucial to successful investing. Too often, investors wind up using rules of thumb—basing their asset allocation strategy exclusively on their age or risk tolerance. This is a decision that is specific to you, and it could easily be the factor determining whether you reach your goals or not. It’s too important to take lightly and requires an asset manager to get a very detailed understanding of you and your goals.
At Fisher Investments, an early step we take in asset management is getting to know you and your family to understand your personal goals and needs. Your Investment Counselor will guide you through a detailed conversation to uncover your goals, time horizon and other factors relevant to crafting an asset allocation strategy. When we have developed a recommended asset allocation strategy for you, your Investment Counselor will walk you through it, explaining the tradeoffs inherent in our recommendation and what they mean in regards to your goals.