This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Long Run: Pick Up the Pieces of Your Asset Allocation Puzzle

"Human beings are designed to fail as investors."

If James O'Shaughnessy said that in 1998-99 -- he probably did, actually -- the senior managing director at Bear Stearns Asset Management would've been laughed out of most rooms: cocktail parties, daytrading centers, the set of CNBC. But when O'Shaughnessy uttered those words this week at Ibbotson Associates' 2003 Asset Allocation Conference, the University of Chicago classroom -- filled with investment professionals who paid a grand to attend -- nodded approvingly. They were there because, like most Americans, they feel it's high time to revisit asset allocation.

Let's be honest: Somewhere over the past five years, a lot of us threw away our asset allocation playbook -- or never bothered to read it in the first place. Let's be even more honest: The financial media -- including my two employers during the past five years, The Wall Street Journal and TheStreet.com -- didn't always champion the cause of asset allocation, even though it is the most important factor for every investor.

Consider: A 1991 study by Gary Brinson, Brian Singer, and Gilbert Beebower in the Financial Analysts Journal concluded that asset allocation makes up 91.5% of an investor's return over the course of his lifetime; market timing constitutes about 1.8% and stock selection 4.6% -- yet most investor-oriented publications devote most of their time and energy to short-term, often stock-specific matters that have a negligible bearing on an intelligent long-term investor's portfolio.

As investors, we have spent the past three years paying for our failures -- that's what happens when manias end. If we don't fix it now, we will pay for that mistake when we retire. Investors, wake up from your burst bubble-induced torpor: It's time to get your portfolio's asset allocation in position to succeed for the long run.

The good news is, proper asset allocation doesn't have to be hard -- it's a lot easier than trying to determine a fair price for General Electric (GE) or Cisco (CSCO), it involves less work than market-timing, and it's infinitely wiser than letting it sit unchanged (show of hands: who's still 100% large-cap stocks?).

Over the next week or so, I will devote several Long Run columns to asset allocation for the long run. I can say with certainty that a useful asset allocation series is more important -- and, ultimately, more profitable to our readers -- than a year's worth of stories on Cisco, General Electric, and Microsoft (MSFT).

We will discuss specific asset-allocation models in the coming days -- from the simple to the relatively sophisticated. But it's imperative to begin with an overview of the most common pitfalls of asset allocation.

1 of 5

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs