Are you frustrated with the market downturn we’ve seen in the past few weeks? If so, you might need to make some adjustments to your portfolio, i.e. 401(k), 403(b), etc. William Bernstein, author of The Intelligent Asset Allocator said, “The essence of effective portfolio construction is the use of a large number of poorly correlated assets.”
What does he mean by “poorly correlated?” I’ll get to that in a minute. First, I want to quote another master of investment strategy. Roger G. Ibbotson is emeritus professor of the practice of finance at Yale School of Management. He said, “On average, 94 percent of the variability of returns and 100 percent of the absolute level of return is explained by asset allocation.”
Now let’s summarize these two statements. A viable portfolio that is poised to make decent returns has two characteristics: 1. It is diversified 2. The assets don’t behave identically. In other words, asset A doesn’t move in the same direction as asset B when the stock market goes up and down.