22 March 2003 Asset Allocation Review through 2002
The most important factor determining your financial success is your asset allocation. You can hit homeruns with the occasional individual stock pick or a great market timing move, but doing either over and over a period of decades is hard, if not next to impossible, to do. The experts say you are much better off allocating your assets between stocks, bonds, real estate and cash to fit your lifestyle and risk parameters then let the market do its work for you. In this article, I'll show you what past allocations have returned over the past 10 years so you can decide what allocation is best for you.
Core and Explore
As I say on my Welcome Page, I advise a "core and explore" approach to investing.
Core means place 80 to 99% of your money into a CORE, buy-and-hold, no load, mostly indexed, mutual fund portfolio. Explore with the remainder as you learn and try to beat the core portfolio.
You can use the "explore" part to try your hand at individual stock picking, market timing, managed mutual funds, etc. to see if you can beat the averages. Many use my stock picking advice in my newsletter as a way to "explore". If you do beat the averages, then the explore portion of your portfolio grows faster and you get to critical mass faster. If you don't beat the averages "exploring", then the smaller portion allocated to personal active management doesn't significantly impact your overall goal of reaching critical mass.
Benchmarking
Key to measuring your success is to have a suitable benchmark to compare your results to.
For this article, I will use a "benchmark portfolio" consisting of "Vanguard Total Stock Market Index Fund Investor Shares" and "Vanguard Total Bond Market Index Fund Investor Shares".
I will give returns for portfolios comprising 80:20, 50:50 and 20:80 Stock:Bond ratios. You can then decide what portfolio to compare your personal results with.
Data Sources
The "total annual returns" I will use in these calculations include "Capital Return" and "Income Return". "Capital Return" is net asset value appreciation measured as "price per share" while "Income Return" is simply the dividends paid.
Vanguard lists these returns by year at their web site. You have to navigate into the site and click on "Performance" or use:
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