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Asset Allocation - Does it still work?

Asset Allocation - Does it still work?

The gyrations in financial markets over the past decade have, for many, created the sense that diversification, as an investment concept is no longer useful. Had you invested $1,000,000 in a diversified basket of stocks, like the S&P 500 at the beginning of 2000 and held for the ten years ending in 2009, you would have been left with $908,832. The impact of inflation would have reduced the purchasing power to approximately $726,000, or a real decline of almost 25%. This result is further devastating to the individual who might have been trying to live off of their investment portfolio.If annual distributions of $50,000 had been taken from the original $1,000,000 invested in the S&P 500, only $377,882 would have remained by the end of the period!

This very tumultuous decade drove many to abandon the idea of diversification and securities markets altogether in exchange for low yielding “safer” alternatives like CDs and government bonds. The problem with this way of thinking is that diversification isn’t simply owning a basket of different kinds of stocks, but rather different asset classes. By incorporating different types of assets like bonds, commodities, and stocks the end result would have been much better.

For example, had you taken the same $1,000,000 and invested it equally between bonds, commodities and stocks over the ten-year period beginning in 2000 and holding through 2009, you would have ended up with $1,735,027.* After the impact of inflation, you would have had the equivalent of $1,388,021 in purchasing power or an increase of almost 40%. With annual distributions of $50,000 you would have finished the decade with $1,091,048 or $92,048 more than the original principal. Thus, even in an environment that many consider to be the worst since the Great Depression, proper diversification still proved to be a successful tool in growing your assets and protecting your portfolio against the effects of inflation.

Although many experts and advisors understand the benefits of diversification, too many are quick to abandon this and other time-tested strategies when they see the potential for higher possible returns that riskier, more concentrated investment strategies can provide. The problem with these types of higher return strategies is that they invariably have lower probabilities of success and often have tragic results when they fail. Our research also indicates that even over long periods of time, the additional risk taken may only generate small, incremental units of return.

At MutualWealth, we continue to focus on diversification as a valuable tool that can give our clients peace of mind during even the most challenging of financial environments. As always, we are appreciative of your confidence in our capabilities and look forward to serving you well into the future.

Shayne Nagy, CTFA
Senior Vice President
Trust and Investments 

* As represented by Barclays Aggregate Bond Index, Goldman Sachs Commodities Index and S&P 500.


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Asset Allocation - Does it still work?

Asset Allocation - Does it still work?

The gyrations in financial markets over the past decade have, for many, created the sense that diversification, as an investment concept is no longer useful. Had you invested $1,000,000 in a diversified basket of stocks, like the S&P 500 at the beginning of 2000 and held for the ten years ending in 2009, you would have been left with $908,832. The impact of inflation would have reduced the purchasing power to approximately $726,000, or a real decline of almost 25%. This result is further devastating to the individual who might have been trying to live off of their investment portfolio.If annual distributions of $50,000 had been taken from the original $1,000,000 invested in the S&P 500, only $377,882 would have remained by the end of the period!

This very tumultuous decade drove many to abandon the idea of diversification and securities markets altogether in exchange for low yielding “safer” alternatives like CDs and government bonds. The problem with this way of thinking is that diversification isn’t simply owning a basket of different kinds of stocks, but rather different asset classes. By incorporating different types of assets like bonds, commodities, and stocks the end result would have been much better.

For example, had you taken the same $1,000,000 and invested it equally between bonds, commodities and stocks over the ten-year period beginning in 2000 and holding through 2009, you would have ended up with $1,735,027.* After the impact of inflation, you would have had the equivalent of $1,388,021 in purchasing power or an increase of almost 40%. With annual distributions of $50,000 you would have finished the decade with $1,091,048 or $92,048 more than the original principal. Thus, even in an environment that many consider to be the worst since the Great Depression, proper diversification still proved to be a successful tool in growing your assets and protecting your portfolio against the effects of inflation.

Although many experts and advisors understand the benefits of diversification, too many are quick to abandon this and other time-tested strategies when they see the potential for higher possible returns that riskier, more concentrated investment strategies can provide. The problem with these types of higher return strategies is that they invariably have lower probabilities of success and often have tragic results when they fail. Our research also indicates that even over long periods of time, the additional risk taken may only generate small, incremental units of return.

At MutualWealth, we continue to focus on diversification as a valuable tool that can give our clients peace of mind during even the most challenging of financial environments. As always, we are appreciative of your confidence in our capabilities and look forward to serving you well into the future.

Shayne Nagy, CTFA
Senior Vice President
Trust and Investments 

* As represented by Barclays Aggregate Bond Index, Goldman Sachs Commodities Index and S&P 500.


Contact a Representative Today

Back to Education Resources

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