Structure, or asset mix, determines most of the performance in a diversified portfolio. Investors choose asset classes to play different roles in a portfolio, and their appetite for risk guides their asset allocation.
Capital markets are composed of many classes of securities, including stocks and bonds, both domestic and international. A group of securities with shared economic traits is commonly referred to as an asset class. There are several asset classes, all with average price movements that are distinct from one another. Investors can benefit by combining the different asset classes in a structured portfolio.
A full range of asset classes includes small and large stocks, domestic and international, value and growth, emerging market countries, global bonds, real estate, and even municipal bonds. Because the asset classes play different roles in a portfolio, the whole is often greater than the sum of its parts. Investors have the ability to achieve greater expected returns with less price fluctuation and more consistency than they would in a less comprehensive approach.
However, because no two investors are alike, there is no single "optimal" asset allocation. Each investor has his or her own risk tolerances, goals, and life circumstances that dictate the weightings of core and asset class portfolios. You should consult your financial advisor or plan administrator to help you determine an appropriate mix. In general, the greater the proportion of stocks a portfolio holds, especially small cap and value stocks, the more "aggressive" is its risk and the greater is its expected return.
A full range of asset classes includes small and large stocks, domestic and international, value and growth, emerging market countries, global bonds, real estate, and even municipal bonds. Because the asset classes play different roles in a portfolio, the whole is often greater than the sum of its parts. Investors have the ability to achieve greater expected returns with less price fluctuation and more consistency than they would in a less comprehensive approach.
However, because no two investors are alike, there is no single "optimal" asset allocation. Each investor has his or her own risk tolerances, goals, and life circumstances that dictate the weightings of core and asset class portfolios. You should consult your financial advisor or plan administrator to help you determine an appropriate mix. In general, the greater the proportion of stocks a portfolio holds, especially small cap and value stocks, the more "aggressive" is its risk and the greater is its expected return.
A Structured Approach to Asset Allocation
Hypothetical Portfolio Annualised Returns 1999 - 2010
Hypothetical Portfolio Annualised Returns 1999 - 2010
Rebalanced annually. All returns are expressed in Australian dollars. Index data is total return unless otherwise specified.
* Annualised number is presented as an approximation by multiplying the monthly or quarterly number by the square root of the number of periods in a year. Please note that the number computed from annual data may differ materially from this estimate.
Data used for each asset class is as follows: Cash: UBS Bank Bill Index, Australian Large: S&P/ASX100 Index, Australian Value: Fama/French Australian Value Index, Australian Small: S&P/ASX Small Ordinaries Index, Global Large: MSCI World Index, Global Value: Dimensional Global Large Value Index, Global Small: MSCI World Small Cap Index (net div.) S&P/ASX data reproduced with the permission of S&P Index Services Australia. MSCI data copyright MSCI 2011, all rights reserved. UBS data reproduced with the permission of UBS Warburg Australia Ltd.
The performance presented is historical and past performance is not indicative of future performance. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
* Annualised number is presented as an approximation by multiplying the monthly or quarterly number by the square root of the number of periods in a year. Please note that the number computed from annual data may differ materially from this estimate.
Data used for each asset class is as follows: Cash: UBS Bank Bill Index, Australian Large: S&P/ASX100 Index, Australian Value: Fama/French Australian Value Index, Australian Small: S&P/ASX Small Ordinaries Index, Global Large: MSCI World Index, Global Value: Dimensional Global Large Value Index, Global Small: MSCI World Small Cap Index (net div.) S&P/ASX data reproduced with the permission of S&P Index Services Australia. MSCI data copyright MSCI 2011, all rights reserved. UBS data reproduced with the permission of UBS Warburg Australia Ltd.
The performance presented is historical and past performance is not indicative of future performance. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.