It’s All in the Mix | Financial Planning Chapel Hill l Old Peak Financial Advisors

It’s All in the Mix

May 12, 2011

Old Peak Finance - It's All in the Mix

It’s All in the Mix

May 12, 2011

I’ve previously written that low-cost, passively managed mutual funds out-perform high-fee, actively managed funds over the long-term.  So the first step in selecting the right investments is avoiding high-fee products.  But there’s much more to it.

The real key to attractive returns with acceptable risk is in how you combine these funds — getting the proportions right.

Here’s a simple example.  Over the past 10 years, a low-cost fund tracking the US stock market went up, on average, 3.9% per year.  But a 50/50 combination of two funds – the US stock market fund and a fund tracking all non-US stocks – did better: 5.4% per year.  If we add in funds tracking other important sectors – emerging markets, bonds and real estate  – the return over the past ten years would have been over 7% annually.  Over 10 years, you would have doubled your money, compared to only a 50% increase with US stocks.  And by diversifying, you would have reduced your risk.  The past is no guarantee of the future.  However, history teaches us that, on average, a diversified portfolio will generate attractive long-term returns with lower risk.

“Asset allocation” – the process of deciding which types of investments to select, and what weighting each should have — is far more important than picking individual stocks or funds.  A value-added adviser will spend their time determining the right mix, and matching that to a client’s risk tolerance and financial goals.  How much to put into international? Emerging markets? Commodities?  Real estate?  Short, intermediate and long-term bonds?  Over time, the adviser will continue to monitor those weightings as a client’s situation, and the world, changes.

In investing, it’s all in the mix.

This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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