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 The
mix of indexes in your portfolio, or your asset allocation,
accounts for a little more than 100% of
your total return on average. The "little more than"
refers to the negative returns of active management.
Active returns are near zero, but negative on average.
This is also referred to as your Investment Policy.
As Charles Ellis points out in his 1985 classic, Investment
Policy, it is the most important choice an investor
can make. In this Step, we will review various
mixtures of risk exposures and show the long-
term historical returns of those portfolios. Now
that you have established a Risk Capacity™, you need
to evaluate risk before actually taking it. This will
complete the matching of Risk Capacity™ (people) and
risk exposure (portfolios).
Numerous studies, including one by the
worldwide accounting firm PriceWaterhouseCoopers ,
conclude that index funds will best achieve an investor's
goals, making them a perfect way to implement your Risk
Exposure. This concept is even incorporated into legal
guidelines, under the Prudent Investor Rule.
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