ABCs of Investing

Why The ABCs Focus Is Asset Allocation!

Because of its Buzz Word status and general acceptance as a valid investment concept, Asset Allocation, which is responsible for over 90% of investment return*, is the most important and most frequently misunderstood concept in the investment lexicon. The most basic of the many confusions surrounding Asset Allocation is the idea that diversification and Asset Allocation are one and the same. Diversification takes place within the Asset Allocation divisions, or buckets (asset classes). Asset Allocation is a planning tool, not an investment strategy... few investors take the time to appreciate the distinction between the two. Asset Allocation is a method of creating an investment portfolio consisting of different asset classes (such as equities, fixed income, and cash) in order to achieve the maximum long-term return of the investments while reducing the risk to the minimum. An investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Participants in 401(k), 403(b) and 457 plans, as well as individual investors, are responsible for making personal decisions on how to allocate their assets among different securities and/or mutual funds. Mutual funds and/or securities are distinguished by asset class, (e.g., growth stocks, value stocks, investment-grade corporate bonds, high yield bonds, international stocks, domestic stocks, etc.). Hence, Asset Allocation = Asset Class Investing.

Studies have shown that 91% of investment performance is due to asset allocation, as opposed to market timing or having the best managers for the various asset classes.*

*Source: "Determinants of Portfolio Performance II: An Update" by Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May/June 1991.

Examples of asset classes!

cash (i.e., money market accounts)
bonds: investment grade or junk (high yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets
stocks: value or growth; large-cap versus small-cap; domestic, foreign, emerging markets
real estate
foreign currency
natural resources
precious metals
luxury collectables such as art, fine wine and automobiles
REITs (real estate investment trusts)
International Investments: foreign or emerging markets

To further break down equity investments into additional asset classes consider the following:

By size:
   Large-Cap
   Mid-Cap
   Small-Cap
By style:
   Growth
   Blend
   Value

All investments, whether in the form of an individual stock or a mutual fund, belong to an asset class. Participants in 401(k), 403(b) and 457 plans, individuals with IRAs, as well as individual investors, all are responsible for making personal decisions on how to allocate their assets among different mutual funds. Mutual funds are distinguished by asset class because of the securities they hold, (e.g., growth stocks, value stocks, investment-grade corporate bonds, high yield bonds, international stocks and domestic stocks, etc.). There is no greater advantage to using mutual funds than diversification. Diversification is the idea of spreading out your money across many different types of investments, i.e., different stocks within asset classes. Knowledgeable investors diversify because it greatly reduces risk without sacrificing returns. When one asset class is down another might be up. With an understanding how asset classes have performed historically, you are able to implement the concept of asset allocation. Asset class performance is the core of The ABCs Website, comprised of a series of seminars contrasting how different asset classes have performed over the last 82 years, i.e., Growth versus Value, Large-cap versus Small-cap, International stocks versus Domestic stocks, Real Estate versus bonds, etc. With this knowledge you will understand which asset classes have performed best; therefore enabling you to make better asset allocation decisions.

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