The index portfolios that are the
best long-term target asset allocations for investing
are divided among three broad asset classes: fixed
income (bonds); U.S. stocks; and foreign stocks. The
stocks are further divided by size and value (book-to-market
ratio). For an explanation as to why Investment Policy Explains All, please read this article. This article essentially confirms that your asset
allocation of a portfolio of index funds explains
100% of your long term expected risk and return. If
you are having trouble understanding this article,
please call IFA, 888-643-3133.
To confirm the
consensus of opinion of Financial Economists for the
use of risk-scaled index portfolios as simulated historical
benchmarks, please refer to the Financial Economists
Roundtable: Statement on Risk Disclosure by Mutual Funds, September
18, 1996.
Matching
People with Portfolios
Once the above
article is understood, the only decision left is where
should an investor be on the risk capacity versus
risk exposure line. This is very important because
returns are optimized when investors are on the line.
Risk capacity can be estimated using the Risk Capacity
Survey and risk exposure correlates to the 20
investment policies (asset allocations of indexes)
shown in Figure 2 below. Where are you and your investments
on the graph in Figure 1 If you do not know, your
investments are equivalent to an uninformed guess
or speculation. In Figure 1, investment policies with
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