The Basic Theory of Asset Allocation

Common Investment Mistakes

• Selling after the market has dropped significantly, and then waiting to buy until after the market has already made a major upward move.
• Chasing last year’s hot investments.
• The S&P 500 Index is an unmanaged index used as a general measure of market performance. You cannot invest directly in an index. Past performance does not guarantee future results.
• No investment category performs well all the time.
• Different categories frequently move in different directions.
• The leader in one year is often an under-performer a year or two later.

Asset Allocation

• A strategy for creating a personalized portfolio by combining stocks, bonds, and cash equivalents in varying proportions.
• The selection of the style & class of investments, as well as the percentage weighting within each investment.
• There’s some science behind the design of an investment portfolio.
• Harry Markowitz helped develop the concept of an “efficient portfolio” that shows the highest potential return for any given level of risk, or the lowest level of risk for a potential return. These ideas form the core of Asset Allocation.

Changes in market leadership are unpredictable. The Callen Periodic Table of Investment Returns over periods of time reflects this fundamental axiom. Selection of the asset mix is one of the most important determinants of long-term investment performance.

The theory of asset allocation can be good start when building your portfolio. As you become more adept you may elect to modify your modeling to fit the market environment.