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.

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:

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, enter VTSMX or VBMFX then click on "Performance."

Wilshire also has an "index return calculator" that is very useful for examining various periods and benchmarking indexes.

Returns By Year

Below I calculate the return each year for 100% in the Total Stock Market (VTSMX), 100% in the Total Bond Index Fund (VBMFX) and three allocations of VTSMX:VBMFX as indicated. For example, in 2001 an asset allocation of 20% in VTSMX and 80% in VBMFX returned a positive 4.55% while it lost 2.16% in 1994.

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2. Jun 21, 2003 4:34 PM
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In response to message posted by stevo5551:

If you look out long enough, I believe the Nasdaq, as well as growth and value stocks ...

-- posted by Kirk

1. Jun 21, 2003 3:20 PM
Kirk: Value stocks have offered the same performance with less volatility over long periods of time. If they are indexed with a low cost, low turnover and higher dividends ( taxed at a lower rate now ...

-- posted by stevo5551

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