5. Own markets instead of stocks (asset allocation)
Asset allocation is the process of dividing up your investment money to create a portfolio that minimizes risk and maximizes returns. Some people think it's all about which stock you own. Wall Street would certainly have you believe in this notion. But in truth, investment success is more dependent on which markets you choose.
How did we arrive at this conclusion? We looked at research from experts. Yale professors studied money managers over 10 years to uncover the source of their portfolio performance. They found that 90% of the returns came from the markets where they invested. Less than 10% came from the individual stocks they bought and the timing of buying and selling investments. For example, if they owned small cap value stocks and that group of stocks did well that year, the performance of that market was the source of their success-not the specific small cap stocks they had chosen.
MarketRiders portfolios balance risk by choosing complementary markets instead of individual stocks. Our portfolio engine will show you how to allocate funds according to your age, experience, amount of money to invest and risk tolerance.
Own more markets to reduce your risk (diversification)
You might think that as Wall Street goes, so goes the world. But when you study world markets today, you quickly see that they actually tend to move quite independently. Therein lies the secret of diversification.
Diversification is kind of like creating a prized recipe. Garlic, lemon, oregano and thyme are not too appetizing on their own. But when skillfully combined with a host of other ingredients, the results can be spectacular.
Markets are the ingredients of successful diversification-and the more you have, the better. You want to own a host of diverse markets, and not just safe ones. Horseradish might be dangerous if consumed by itself, but as part of an overall recipe it delivers positive results. The same goes for adding risky markets. Adding one or two to the mix can have a leavening effect that may actually reduce risk and volatility, without sacrificing performance.
Savory stew
U.S. stocks and stocks in other developed countries tend to move independently from each other. So allocating money to both markets creates instant diversification. Emerging markets also move to the beat of a different drummer. Bonds and real estate are even further afield from stocks, so adding these markets provides excellent diversification. Look at the chart below and you'll see that every year, some market wins and others lose and no expert can predict the future. So the answer is simple -- own them all!
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What The Experts Say
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