The Balanced Portfolio

In the wake of the market debacle that began a year ago, many Wall Street analysts declared that asset allocation was no longer a valid way to structure a portfolio. After all, they claimed, the bear market didn’t discriminate between stocks and bonds, but mauled both of them. The facts, however, show that those opinions aren’t quite on the mark. Asset allocation is still a vital part of the average investor’s strategy and year-end is a good time to look at your holdings to make sure the volatile markets haven’t put them out of whack with your financial goals.

Bonds, in fact, did manage to avoid the worst of the carnage last year, with an all-bond portfolio actually giving investors a gain of just over 5% in 2008. The truth is, though, that even a small dose of stocks in a portfolio turned those profits into losses. A portfolio with just 13% of its assets invested in stocks showed a loss in 2008, while one with a 50/50 stock/bond allocation lost close to 16%. An all-stock portfolio suffered the worst, however, dropping more than 37%.

The lesson in those statistics, say many financial advisors, is not that asset allocation is dead, but that it’s still important to maintain a mix of investments that reflects your financial goals and your risk tolerance. A risk-averse investor who plowed more money into bonds last year may not have averted losses, but did avoid the huge hit that stock investors took. How should your portfolio be structured? For tips on rebalancing, visit Investopedia.