Structure

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. The advice of a professional fee-only financial advisor is fundamental when making such important decisions. 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 1993 - 2006

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.

¹Price only index.

Tour: The Roots of Dimensional Investing

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