distribution of investments in different instruments will not save you from losses in a falling market. What's the point of diversification?
In recent years, said many high-sounding words about the benefits of allocation assets. But in a recent fall of stock indices investors realized how exaggerated was the topic. Allocation, or distribution of assets (in fact, really just a beautiful name of diversification) does not protect you in a bear market. No optimal asset allocation does not exist.Yet less reasonable diversification, as well as controlling costs - a key moment in the rational long-term investment. Over time, both These measures increase your chances for profit.
It is time to separate the myths from the reality of the distribution of assets
Myth 1
Allocation protect you in a bear market
Allocation of assets - is the strategy of choice is fundamentally different assets (stocks, bonds, real estate funds), the definition of their shares in the investment portfolio and the selection of specific securities. To invest in individual asset classes, I prefer index funds and ETF, because they have small costs they are effective in terms of taxation. But you can invest in the same tools and by actively managed funds.
Allocation should pursue two objectives: to set the level of expected long-term portfolio risk and return, and reduce the likelihood of major losses. Not surprisingly, the larger the the risk you take, the higher will be the expected returns. But the distribution of assets is also recommended as a way to diversify risks. According to this representation, each class of assets in the portfolio is associated with different risks, thus reducing the overall cumulative risk of the portfolio and smooth out short-term fluctuations.
truth is that the distribution of assets reduces the probability of large losses in a falling market, but does not prevent losses. When economic decline of your portfolio will fall in line with the overall risk to which you went. There's no getting around it.
As for performance, if different assets are unrelated risks, it is only partly true. The global economic crisis could lead to a simultaneous decrease in total investment. So it was in 1987, 1994, 1998, 2001 m, 2008. It happened in the current year. Because of the debt crisis of the Greek stocks and corporate bonds fell simultaneously.
On Wall Street busy selling investment products, prefer not to talk about it. In 2007 and early 2008, investors have invested in raw materials and hedge funds, because they were told, that these investments are not correlated with stocks and can protect in a bear market. But these risky assets have fallen along with the rest of 2008 and early 2009, investors had thrown in shock. Although this should not be a surprise to them.
Myth 2
tactical allocation - the best option in volatile market
There are two schools of asset allocation. The first is implementing a strategic approach by which investments should be allocated to the fixed shares in accordance with long-term needs, regardless of market conditions. Annually re-balanced portfolio to return ratio investment to target values. School Tactical Asset Allocation, by contrast, the share of asset classes varies, depending on short-term forecasts profits. Term tactical asset allocation can vary from several days to several years.
Tactical asset allocation - the largest fraud on Wall Street. People want to believe that someone somehow can tell them where to invest money today and are willing to pay handsomely for such advice. Each year, billions of dollars wasted on tips that do not work.
Agency Morningstar monitors tactical decisions of investors, analyzing the inflow and outflow from different classes of investment funds. Profits of investors is always lower yield funds, which reflects the folly of making tactical asset allocation.
Strategic asset allocation - is a more robust way, because he is insured against loss when trying to predict the motion market. You just need to choose a fundamentally different investments for your portfolio, invest in their funds in fixed proportions and each year the balance investments to maintain the specified share, regardless of what you think you or someone else. Over the past 10 years this method has brought quite good results.
Myth 3
There is the best way to strategic asset allocation
The ideal asset allocation does not exist at As previously it is impossible to know. Some people persist in trying to decide whether to invest them in foreign shares of 30% or 33%. This question can not answer no, and it does not matter. What's really fundamentally the long term - this is what share you invest in stocks and how much - in bonds. Rest - Just tinsel.
Many investment firms are promoting computer models, they argue, can choose an optimal distribution scheme assets based on your answers to a few simple questions. This is as absurd as computer dating service, selected the perfect pair of responses ten questions.
To choose an appropriate scheme for the distribution of assets, you must know your financial and life situation and of yourself. It is necessary to analyze the size of your state, the situation with work and income, savings and spending, the housing situation, the annual income required by the capital gains when he you will need. Need to know who will inherit the property after your departure. In addition, proper asset allocation - the one that will survive the deep and protracted downturn in the market. This ratio, which will buy more shares when they fall, and sell when they grow up. There is no courage in daring selection of risky investments, a loss which in bad market you do not have the heart to bear.
Myth 4
need constant re-balancing the portfolio
true. When you restore a relationship you are selling assets (eg stocks), which increased in price, and buy assets, whose share has fallen below a predetermined values. The positive side of this process is that it forces you to sell stocks when they're too grown up, and buy when they fell, not being involved in a hopeless game of finding the right moment for the transactions.
But too active trading does not give any advantages. Annual recovery balance leads your investment with long-term goals and provides almost the same benefits as the more complex methods of balancing the portfolio. The date of restoration of the balance can be selected on January 1, your birthday, wedding anniversary or the beginning of baseball season. No matter what it is day, as long as he was a constant.
Over the past ten years, are widely diversified portfolio that includes U.S. stocks, foreign shares, stock funds that invest in real estate and bonds, and the relation in which every year was restored, brought each year on average one percentage point more than the portfolio in which the ratio was not restored. This advantage is due to the high volatility of the market. During over a long period of recovery in the past, the benefits of the portfolio were lower, and sometimes nonexistent. But still continue to produce this operation once a year.
Myth 5
more funds, the higher the level of diversification
Owning shares in a larger number of funds does not necessarily make your investment more diversified, because they may belong to the same investment category and keep the same portfolio of securities. In 1999 I was subjected to Audit portfolio manager of a car company, who believed that his retirement savings are well diversified: he held shares of the ten investment funds. Each of these funds are implemented the similar investment objectives: growth, aggressive growth, growth of capital or technology. Portfolio was not diversified and collapsed in the fall of technology stocks in 2000-2002.
that investments have been diversified, we must have asset classes with fundamentally different risks. These asset classes should also have expected returns above inflation, like stocks and government bonds. This is also true for real estate investment funds and foreign stocks. These are good classes of assets for acquisition.
There are several asset classes, which I do not use for allocation because they have low returns or high costs. A good example - the raw material. In the long term its yield is not enough to beat inflation. Another example - it's hedge funds. These products are, strictly speaking, are not asset classes. This is illiquid, expensive, actively managed investment pools, without which you can do.
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