Sector Allocation – Don’t Sweat It

I found this article on the Canadian Capitalist a while ago, “Asset Allocation Explained” and the part I found most interesting was the link to some comments by Jonathan Clements (from the Wall Street Journal) on Asset Allocation:

I used to agonize over what percentage of a portfolio should be allocated to, say, emerging-market stocks, or high-yield junk bonds, or large U.S. companies. But now, whenever somebody asks me how much to allocate to a particular sector, I usually respond that — within reason — it doesn’t much matter [sic].

Yeah, this takes some explaining. If you tap into a broad market segment using a well-diversified mutual fund, you can be pretty confident that you will make decent money over 30 years. Moreover, over those 30 years, there probably won’t be a radical difference in performance between, say, U.S. stocks and foreign stocks, or between, say, intermediate-term government bonds and intermediate-term corporate bonds.

With that in mind, you shouldn’t fret too much over your precise allocation to large stocks, small stocks, foreign stocks, REITs, corporate bonds, government bonds and other market sectors. Instead, what counts is commitment.

In other words, whether you allocate 15% or 30% of your stock portfolio to foreign markets probably won’t make a whole heap of difference over the next 30 years — provided you stick with your target percentage. The danger: You get greedy or fearful, trade in and out of your foreign funds and end up missing out on the sector’s handsome long-run gains.

As someone who has agonized over my own allocation, as a fan of rebalancing and as someone who has seen the negative effects of too much performance-chasing and trading in my own portfolio, I found these words comforting. Diversify to reduce risk to a level that is appropriate for your situation. Pick an allocation, stick with it, and rebalance when required.

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