Journal of Financial Planning: August 2004
It is now common practice in presentations to individual investors and 401(k) plan participants to show a pie chart demonstrating that asset allocation—predominantly the allocation among stocks, bonds and cash—is the most important investment decision, explaining 93.6 percent of portfolio returns. The presentations generally show how historical combinations of stocks, bonds and cash have performed over various time periods: the longer the time period, the greater the certainty that stocks will outperform bonds or cash based on historical data. The presentations go on to discuss mutual fund options offered to implement the asset allocation advice. The presumption by the investor or the plan participant is that once the risk tolerance (and possibly the time horizon) has been established, investing is simply a matter of implementing a fixed mix of stocks, bonds and cash using the mutual funds being offered.
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