The Long-Term Lesson: It Pays to Diversify - New York Times

by: Roger Nusbaum

This is an article from the Sunday New York Times about portfolio construction and diversification, writes Roger Nusbaum. These types of articles are the most interesting to me because of my belief that stock selection is less important that asset allocation, country weighting, sector selection and all of the other top down things that come before picking stocks.

If you are a do-it-yourselfer I would encourage you to seek out articles like this one. This one article is by no means a panacea but there is some process there, and I can't write enough times that every investor should continue to try to learn. When I write take a little from here and a little from there to create your own process, this type of article is one of the theres I am talking about.

The author cites a study from Ibbotson's about the following asset allocation;

55% equities
30% bonds
10% commodities
5% cash

According to the article, this portfolio had an average annual return of 7% compared to 3.6% for a stock only portfolio. Over a ten year period the all equity portfolio won 12.1% to 11% and over 15 years equities won 10.9% to 10%.

The returns are not radically different for the longer time periods but slightly so. I don't know if the returns of either portfolio include dividends or not but keep in mind if the SPX is yielding 1.8% these days it would not take too much work to add an extra 50 basis points or so in dividend yield. For an investor willing to apply themselves maybe 100 basis points in yield can be added.

If those that say we will have flat-ish returns in the equity market for several years to come are right it will be very important to have access to other asset classes and to have some extra yield in the equity portion of your portfolio.

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