Why Asset Allocation is Important Although asset allocation and diversification are words that are regularly used when thinking about proper portfolio construction, more often than not lip service is not followed by actual attention to the process of putting together a grouping of investments that makes sense. What makes sense is a collection of securities within a variety of asset classes with the objective of gaining worthwhile returns while limiting risk exposure. It's not hard to do. One traditional approach to asset allocation has been a 60/40 split between stocks and bonds, decreasing the percentage allocation to equities as investors get older. This has not been a bad way to go, but simply thinking in terms of U.S. stocks and bonds overlooks the opportunities available by considering a wider variety of asset classes, including international stocks, real estate, and high yield (a.k.a., junk) bonds. A few years ago, I completed a study of asset class returns from 1
Investment and economic observations by N. Russell Wayne, CFP, MBA. Mr. Wayne is the president of Sound Asset Managment, inc. and former Managing Editor of The Value Line Investment Survey.