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Allocate your assets

- Alan Lavine and Gail Liberman

Asset allocation, or how you split your assets among stocks, bonds and other assets--hands down--is the single most important factor driving long-term returns.

But you'd never know it by the way most of us invest.

When you split up your investment pie, you reduce the volatility of your overall investment. When one security zigs, the other zags.

The idea is to figure out how much risk you can handle. Based on that information, you can apportion your investments among risky and low-risk investments. Determine the specific percentage of your money, for example, that you can live with in risky stocks, vs. lower-risk bonds and safe investments. Each year, you adjust your holdings to maintain the same percentage mix.

"When it comes to portfolio performance, the three most important factors are allocation, allocation, and allocation," Marc Mayer, chairman of AllianceBernstein Investment Research and Management, New York, reports. "Investors ignore it at their own risk--and, unfortunately, too many do."

AllianceBernstein recently conducted a study of investors and financial advisor attitudes, behavior and knowledge of asset allocation and rebalancing. It studied barriers and catalysts to effective implementation. The results show:

  • One in four investors believes asset allocation is just an industry buzzword. Just fewer than two in five do-it-yourself investors say they have no approach to asset allocation and rebalancing.

  • Sixty-one percent of investors surveyed say it's harder to sell a winning investment to rebalance holdings than it is to admit to a loved one that they're wrong.

  • Fifty-one percent of all advisors say their typical client would be more likely to be able to explain the rules of Texas Hold 'Em Poker than they could the principles of asset allocation.

The price of inattention to asset allocation is considerable: Advisors estimate that the right asset allocation plan would have added 68 percent to a portfolio's return over the past 30 years. More than four of five advisors (83%) believe the proper asset allocation plan could have cut investor losses by at least half during the market correction of 2000 and 2001.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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