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Capital markets are composed of many groups of securities, including stocks and bonds, both domestic and international. A group of securities with shared economic traits is commonly referred to as an asset class. There are several asset classes, each with average price movements that are distinct from one another. Investors can benefit by combining the different asset classes in a structured portfolio.
A full range of asset classes includes small and large stocks, domestic and international, value and growth, emerging and developed countries, global bonds, and even real estate. Because the asset classes play different roles in a portfolio, the whole is often greater than the sum of its parts. Investors have the ability to achieve greater expected returns with less price fluctuation and more consistency than they would in a less comprehensive approach.
However, because no two investors are alike, there is no single "optimal" asset allocation. Each investor has his or her own risk tolerances, goals, and life circumstances that influence the weightings of asset class portfolios. You should consult your financial adviser or plan administrator to help you determine an appropriate mix. In general, the greater the proportion of stocks a portfolio holds, especially small cap and value stocks, the more "aggressive" its risk and the greater its expected return.
| A Structured Approach to Asset Allocation |
| Hypothetical Portfolio Annualized Returns |
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| Monthly: 1988-2007, rebalanced monthly. |
| FTSE data published with the permission of FTSE. Fama/French data provided by Fama/French. UK Small Companies are: 1956-June 1981 provided by London Business School and ABN AMRO; July 1981-present provided by simulated by Dimensional from StyleResearch securities data. MSCI data copyright MSCI 2008, all rights reserved. Non-UK Small Companies are simulated by Dimensional from StyleResearch securities data and Fama/French index data in the following proportion: 25% Continental small companies, 12.5% Asia Pacific ex Japan small companies, 12.5% Japan small companies, and 50% Fama/French US Small Cap Index. Emerging Markets Companies are an equal-weighted mix of the index of the primary stock exchange in each emerging market where Dimensional has invested. |
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