Saturday, November 18, 2006

Asset Allocation: All Bond Portfolio More Risky Than Balanced Portfolio?

The American Association of Individual Investors published an article on the free content portion of their site describing five lessons investors should be aware of when making their asset allocation decision. The entire article can be read clicking here.

The five lessons mentioned in the article are:

  1. Lesson One: Mixing bonds and stocks moderates portfolio risk.
  2. Lesson Two: Portfolio risk rises disproportionately slowly as stocks are added to the portfolio.
  3. Lesson Three: An all-bonds portfolio is not the lowest-risk portfolio.
  4. Lesson Five: An often-overlooked risk for the long-run investor is the risk of having a too-conservative portfolio.
The article also contains the following table detailing risk and return statistics for various portfolio asset allocations



1 comment :

yielder said...

The five lessons mentioned in the article are:

There's a sixth hidden in the chart: You have to examine data in the context of the time-frame covered by the data.

The period from 1981 is one of continuously declining bond yields to a low in 2003: http://chart.finance.yahoo.com/c/my/_/_tnx. Predicting where rates will go in the future is a fool's game at best. Notwithstanding, obtaining a sustained 9% average annual return in the future is impossible at current levels.