More than any other investment strategy, how you allocate your portfolio can have a major impact on your investment return.
Asset allocation has a dramamatic long-term impact, as you can see by comparing the pretax value of three hypothetical $100,000 portfolios after 20 years. The first portfolio, emphasizing stocks, outperformed the portfolios with larger percentages allocated to corporate bonds and cash.
The account value assumes all earnings were reinvested, and are figured using the average annual returns for each investment category for 1926 through 2003: large-company stocks at 10.4%, corporate bonds at 5.9%, and cash investments at 3.8%*.
Allocation
Value
Stocks
60.0%
$434,000
Bonds
30.0%
$94,400
Cash
10.0%
$21,100
Total
$549,500
Allocation
Value
30.0%
$217,000
60.0%
$188,800
10.0%
$21,100
$426,900
Allocation
Value
10.0%
$72,300
30.0%
$94,415
60.0%
$126,500
$293,215
* Source: Ibbotson Associates, 2004.
Past performance is no guarantee of future results.
As you can
see, the portfolio emphasizing stocks dramatically outperforms
the portfolios with larger percentages allocated to bonds
and cash. Most experts agree that to get the best long-term
returns, you’ll need to have substantial holdings
in stocks and stock mutual funds.
