Asset allocation determines performance
 Except
for the most conservative portfolios which do not hold equities,
every portfolio should be diversified to hold all three assets
classes:
You need cash for security and liquidity so that you can
take advantage of opportunities as they arise.
You need bonds and GICs to help you preserve your capital
and provide a steady income.
And you need stocks for growth to help you beat inflation
and counter the impact of taxes.
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"For big money, stock picking
is irrelevant. Asset allocation is the whole game."
Barton Biggs, Financial guru |
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The question is, what should your asset mix be? Exactly how
should you allocate your capital among those assets? What
percentage should you hold of stocks, of bonds and of cash?
This is what asset allocation is all about. And in case you’re
wondering if it’s important, studies have shown that
over 80% of long-term portfolio performance comes from having
the right asset mix.
Although you may find it hard to believe, this means that
picking the right stock or mutual fund is not as important
as making the right asset allocation decision.
And it means spending some time to determine your appropriate
asset mix is an invaluable exercise before you begin to select
individual mutual funds or stocks.
Your portfolio should contain some non-Canadian investments
Out of the many assets allocation decisions you’ll
make, here’s an easy one – you should plan to
incorporate global investments into your portfolio. This will
give you one more way to boost potential returns and decrease
risk.
Did you know that Canada represents less than 3% of the world’s
investments? That means if you don’t have some international
holdings in your portfolio, you’re missing out on 97%
of all investment opportunities and some of the best performing
companies in the world.
Here are some figures based on annualized returns from the
TSE (now the TSX), S&P 500 and MSCI for the period 1981
to 2001 comparing the performance of a globally diversified
portfolio vs a domestic portfolio.
Domestic portfolio
Canadian equities – 100%
US equities - 0%
International equities – 0%
Annual return – 10.7
Standard deviation – 15.2
Globally diversified portfolio
Canadian equities – 70%
US equities – 15%
International equities – 15%
Annual return – 11.2
Standard deviation – 11.4
As you can see, not only did the globally diversified portfolio
outperform the domestic portfolio, but it experienced a significantly
lower level of risk.
The message is clear. If you don’t include some foreign
stocks in your portfolio, you’ll not only be missing
out on growth, but you’ll incur a higher level of risk
than necessary.
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homepage.
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