Newspaper article St Louis Post-Dispatch (MO)

Asset Allocation Works If You Use It Right

Newspaper article St Louis Post-Dispatch (MO)

Asset Allocation Works If You Use It Right

Article excerpt

Whatever happened to the safety net many investors thought they had? Their strategy was to diversify. They thought that by buying different types of mutual funds, they'd always have at least one or two that were going up.

Then came the decline of '94. Practically every market got hit: U.S. stocks, emerging markets, many foreign-country funds, short- and long-term bonds, even gold-stock mutual funds.

So what went wrong? Is asset allocation just another fad that investors should forget?

Absolutely not. It's the best long-term strategy you could have. You simply may need more information about how it works and what it does.

Asset allocation doesn't stop your investments from losing value when markets go down. But it does save you from having most of your money in sectors that do the worst, says Marshall Blume, a finance professor at the Wharton School.

Asset allocation also stops you from having most of your money in the sectors that do best. But you can't guess which those will be in advance. Even if you get just average performance in rising markets, you'll come out ahead as long as you don't lose a lot in the years when the market goes down.

Investors also need more schooling in how to diversify. You haven't done it if you own Twentieth Century Growth, Berger 100 and Fidelity Magellan. Those are all growth funds. They'll all rise and fall at about the same time.

Instead, you need funds that perform differently from each other, says Carmen Thompson, a consultant at Ibbotson Associates, an investment research firm in Chicago. When one fund is performing poorly, you want others that are doing better (either rising in value or not declining as much).

Take international stocks. During the past five years, they have sometimes moved with U.S. stocks and other times not. But Ibbotson data show that their diversification effect is good. They could easily cushion your portfolio when the American stock market drops.

During the recent market decline, you saw pretty big losses in some narrowly targeted foreign funds, especially those invested in emerging markets. But the well-diversified internationals gave you exactly the cushion you'd want. …

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