Unless your returns are beating Warren Buffett's, you're probably a bit concerned about the future of your invested capital right now.
But suppose I put the above question another way: Is your portfolio diversified? According to a recent poll by Bankrate, 45% of Americans aren't sure.
It's a crucial question to answer, because as stock market scholar Roger Ibbotson affirmed in a recent Rule Your Retirement interview, "Your asset allocation pretty much explains all of your [portfolio's] performance."
With a diversified portfolio singularly determining whether you'll have a worry-free retirement, the stakes are high.
Ancient wisdom, new guise
The idea of spreading one's savings across a variety of opportunities is not a new one. As the oft-quoted axiom of yore puts it, "Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve." Those words come from the Talmud -- the written collection of oral rabbinic interpretations of Mosaic Law.
Today, the topic of diversifying funds relates more to finding one's ideal ratio of stocks to bonds, but the wisdom is still present.
Why is this a good thing, you ask?
Simple. It keeps the riskiness of your portfolio -- and your emotions -- in check.
Keep emotions out of investing
An asset-allocation plan not only keeps your money secure, but also keeps you sane during times when the stock market is not so hot.
Let's face it: If your portfolio lost half its value in one day, your first response might not be self-mutilation, but your emotions would likely lead you to make some irrational decisions, such as selling when these stocks are down.
Only a smart asset-allocation plan can prevent panic.
Diversification really pays
If decreased risk and less stress are not enough to convince you of the merits of possessing an asset-allocation plan, look at this chart showing the returns of several asset classes over the past 30 years:
|
Large-Cap Stocks |
Small-Cap Stocks |
REITs |
International Stocks |
Intermediate Bonds | |
|---|---|---|---|---|---|
|
Annualized return 1976-2006 |
12.8% |
17.5% |
16.5% |
12.5% |
8.2% |
Say you spent the past 30 years invested in an S&P 500 index. Your money would have been spread among powerhouse stocks that whole time; today, that list includes Wal-Mart (NYSE: WMT), PepsiCo (NYSE: PEP), Hewlett-Packard (NYSE: HPQ), Wells Fargo (NYSE: WFC), Oracle (Nasdaq: ORCL), and Merck (NYSE: MRK).
But if that were the case, you'd have missed out on the more impressive gains present in the world of small caps and real estate.
So if you're not the world's best stock picker, it makes the most sense to have your money divvied up among a variety of companies and asset classes. That way, when some take one step back, others will be taking a few steps forward.
Nothing risked, nothing gained
To learn more about implementing an appropriate asset-allocation plan for yourself, and to see some model portfolio allocations, click here to browse through the wisdom of my Foolish colleague, Robert Brokamp, in his Rule Your Retirement service, free for the next 30 days. There's no obligation to subscribe.
This article was first published Nov. 19, 2007. It has been updated.
Fool analyst Adam J. Wiederman is not too emotional, but he's reportedly been seen crying during a chick flick. He owns no shares of any company mentioned above. Wal-Mart is an Inside Value pick. The Fool's disclosure policy is, for the record, diversified.
