Successful Investing Depends on Asset Allocation

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It is your portfolio’s asset allocation, broad global diversification, that you must be most concerned about, more than any other investment strategy or determinant—not stock picking, not market timing, not track record investing, and not costs. Brinson, Singer, and Beebower, in their 1996 “Determinants of Portfolio Performance II: An Update” research paper, confirmed their earlier research that more than ninety-one percent of your portfolio’s performance, appreciation, and growth is dependent on asset allocation. This is very important, so I’ll say it again: More than ninety-one percent of your portfolio’s returns come from prudent diversification!

Abe and Hatti thought their portfolio was appropriately diversified. They had seventeen different mutual funds in seventeen different investment companies. After all, their parents had told them not to put all their eggs in one basket. So they had seventeen separate investment baskets, but not much money invested into any of them. 

Their Overlap Analysis revealed their various money managers were duplicating many of the same stocks and bonds in their seventeen mutual funds. Their investment costs were excessive, their risks were twice as high as the level of risk they were comfortable with, and the worst news was that their investment returns were very low for the high risks they were taking.

Abe and Hatti just had “more stuff,” all duplicating each other. In their case, more was not better! Duplicating assets makes your portfolio expensive and poorly diversified. No one wants to buy Pepsi with six different money managers, some buying and some selling at the same time. Investors have no idea if their different retail mutual fund money managers are buying and selling the same stock at the same time within their portfolio, until they see their portfolio’s Overlap Analysis report. 

It is easy to eliminate duplicity or overlap of investments when each of your mutual funds only holds one level of risk.  This type of mutual fund is called an asset class mutual fund.  Most portfolios are missing at least half of the needed dissimilar asset classes. 

Just like Abe and Hatti: Typical investors are under-diversified and taking on way too much risk for their peace of mind, while receiving too small a return for the extra risk they are taking. 

So many investors’ portfolios have inadequate asset diversification; sadly, they have no clue there is a problem! Ignorance is not bliss; it hurts your future and your future descendants. 

Not knowing is not OK. Get your portfolio analyzed!

Written by: Maria J. Kuitula, a Free Market & Stewardship Coach, co-authored the book, Stress-Free Investing, available at Amazon.com.   She is the President of Wordhouse Wealth Coaching and can be reached at 616-460-6518 or at [email protected]. For QUESTION LISTS and INVESTOR EDUCATION VIDEOS, go to www.WordhouseWealthCoaching.com.

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