is the cornerstone of successful long-term investing. Many
experts agree that the overwhelming determinant of investment performance
is the asset allocation decision: what asset categories to
use and in what percentage. According to studies, this decision
accounts for over 90% of the investment results achieved. Assets
are spread among diverse types of securities, such as domestic stocks,
foreign stocks, and bonds, because the performance of different
asset classes is not always closely related. For example, some periods
have been weak for domestic stocks but remained strong for domestic
bonds, and vice versa. It is impossible to predict which particular
asset category will perform best this year or next. It is important
to recognize that holding asset classes that may not be in vogue
at the moment can pay off in the long run.
Broad asset class diversification
is an effective strategy for minimizing volatility risk.
Too heavy a weighting in the shares of any one company or industry,
or solely in one country, is not prudent. In an increasingly global
economy, attractive opportunities are not limited to domestic markets.
Over time, appropriate international investing can provide increased
returns and lower risk as opposed to a domestic only portfolio.
To put it simply: asset allocation
means that you have an investment plan consisting of many different
asset classes, each with a target weighting and you follow it for
the long term. Different types of assets carry different
levels of risk and potential for return, and typically don’t
respond to market forces in the same way at the same time. When
one asset type is declining in value, another may be appreciating
(though there are no guarantees). Periodically you will want to
trim back the one that has grown past its target, adding that excess
to an asset class that is under its target, balancing things out
again. You don't have to worry if the market goes up or down over
the short term, you just have to be disciplined and adhere to your