Asset Allocation Is Not Dead                                  Page 2

Central to theme of asset allocation is diversification. That is, all assets do not move up or down at the same time. Because they do not behave in the same way at the same time, you lower your risk for your total portfolio by spreading your investments over several asset classes instead of just concentrating it on only one.

As an example, a 100% bond portfolio may be of relatively low risk but if bonds overall perform poorly, then you're sunk. That is why a mix of stocks & bonds is often less risky and generates higher returns then a total bond portfolio.

Gary Brinson, head of Brinson Partners, an institutional money management firm, and one of the leading proponents of asset allocation, argued that this fascination with concentrating your investments goes in cycles. He believes that people are abandoning asset allocation just at the time when they need it the most. While concentrating your investments in high performing sectors may increase your returns in the near term, it will also increase your losses over the long term.

It is exactly at the peak of a bull market when you need asset allocation the most. And this is often when people abandon it because their concentrated investments are doing better than a balanced portfolio. Are we at the top of the bull market now? We may be and we may not be. However, is it more likely that we are today versus 3 years ago? I think the answer is yes. Now is the time to diversify for a market correction. Now is the time to lower your risk and maintain strong returns (maybe not astronomical returns, but strong ones) by using asset allocation.

Julia Curbo manages Portfolios 101, a web site dedicated to portfolio management, personal finance, and retirement planning. A form of this article was originally posted to her Web site in February, 2000.

8/04/00
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