Asset Allocation - Return Versus Risk Trade-off

Return Versus Risk Trade-off

In asset allocation planning, the decision on the amount of stocks versus bonds in one's portfolio is a very important decision. Simply buying stocks without regard of a possible bear market can result in panic selling later. One's true risk tolerance can be hard to gauge until having experienced a real bear market with money invested in the market. Finding the proper balance is key.

Cumulative return after inflation from 2000-to-2002 bear market
80% stock / 20% bond −34.35%
70% stock / 30% bond −25.81%
60% stock / 40% bond −19.99%
50% stock / 50% bond −13.87%
40% stock / 60% bond −7.46%
30% stock / 70% bond −0.74%
20% stock / 80% bond +6.29%
Projected 10 year Cumulative return after inflation
(stock return 8% yearly, bond return 4.5% yearly, inflation 3% yearly
80% stock / 20% bond 52%
70% stock / 30% bond 47%
60% stock / 40% bond 42%
50% stock / 50% bond 38%
40% stock / 60% bond 33%
30% stock / 70% bond 29%
20% stock / 80% bond 24%

The tables show why asset allocation is important. It determines an investor's future return, as well as the bear market burden that he or she will have to carry successfully to realize the returns.

Read more about this topic:  Asset Allocation

Famous quotes containing the words return and/or risk:

    A pun does not commonly justify a blow in return. But if a blow were given for such cause, and death ensued, the jury would be judges both of the facts and of the pun, and might, if the latter were of an aggravated character, return a verdict of justifiable homicide.
    Oliver Wendell Holmes, Sr. (1809–1894)

    Do you want me to tell you something really subversive? Love is everything it’s cracked up to be. That’s why people are so cynical about it.... It really is worth fighting for, being brave for, risking everything for. And the trouble is, if you don’t risk anything, you risk even more.
    Erica Jong (b. 1942)