Benefits of Asset Allocation

Emphasizing the Need for Non Correlated Assets

Studies have shown 90% of an investors return is due to asset allocation. We have several resources that evaluate the need for non-correlated asset classes in an investment portfolio. Source: Ibbotson 1990

To optimize the risk/return relationship, the asset allocation decision should emphasize low-correlated assets that still meet return objectives. Here are several ideas on how to ensure a portfolio includes low correlated assets rather than just a lot of asset classes:

1. Limiting the inclusion of assets with consistently strong correlations.

2. Emphasizing assets with consistently low correlations, which usually means some alternative asset classes such as emerging markets, global bonds, and natural resources. Historically these assets classes have a low correlation to equities.

3. View assets according to how they behave in relation with one another, not their traditional classifications.

In conclusion, the asset allocation decision is crucial to improving returns and reducing risk. Which can be accomplished by incorporating low-correlated assets. Please remember that diversification and asset allocation do not guarantee a profit nor protect against loss in a declining market. They are methods used to help manage risk.