Investment success takes time, but more than anything it takes asset allocation—the strategic division of investments among different asset classes, based on your personal goals, time horizon and risk tolerance.
Consider three scenarios that illustrate different investment strategies. In each situation, $10,000 was invested annually each January for twenty years for a total investment of $200,000. The first scenario shows the results of investing in last year’s best performing asset class (Performance chasers), while the second shows the returns generated by investing in last year’s worst performing asset class (Opportunist). The third scenario shows the results of investing in a portfolio that is diversified across several asset classes in equal proportion each year (Asset Allocator). These returns can’t guarantee future results, but as you can see during this period, asset allocation was the most effective strategy.
20 year period ending December 31, 2009
| |
Total Investment |
Value of Portfolio |
| 1. Performance Chaser |
$200,000 |
$378,334 |
| 2. Opportunist |
$200,000 |
$379,990 |
| 3. Asset Allocator |
$200,000 |
$439,317 |
| This table is for illustrative purposes only and does not depict an actual investment of any John Hancock fund. Your actual results will vary. Asset allocation does not ensure a profit or protection against a loss. Please note that asset allocation may not be appropriate for all investors, particularly those interested in directing the underlying funds on their own. |
Asset allocation in action
An asset allocation plan doesn’t have to be complicated to be effective, but it should include the three basic asset classes: stocks, bonds and cash equivalents. As your investment portfolio expands, your financial professional may suggest additional refinements to broaden your asset allocation. For example, stocks can be further divided by investment style, market capitalization, geographic area and other factors. Bonds can be further divided by investment grade, maturity, sector and geographic area.
Benefits of asset allocation
The goal of asset allocation is to combine investments with different characteristics so that the risks inherent in any one investment can be balanced by assets that move in different cycles or respond to different market factors. And because leadership tends to rotate from one segment of the market to another, asset allocation can also help you gain exposure to market leaders. You won’t have to guess which asset class is going to do well each year if you already have exposure to many different segments of the market.
Your personal asset allocation plan
In order to create an asset allocation plan that is appropriate for you, your financial professional will ask about your investment goals, your time horizon for achieving them and your feelings about risk. This information helps determine the proportions in your asset allocation plan. Your financial professional will continue to monitor your asset allocation—and suggest strategies to bring it back on target if it strays from its original proportions. There’s no reason to change your asset allocation unless your goals or financial situation change. Regardless of what is happening in the financial markets, it’s important to adhere to your plan.
- Source: Lipper. Scenarios were calculated using a buy and hold methodology. The scenarios above included large-cap stocks represented by the Russell 1000 Index, an index that measures the performance of the 1,000 largest companies in the Russell 3000 Index. Large-cap growth stocks represented by the Russell 1000 Growth Index, a index consisting of those companies in the Russell 1000 Index with higher than average price-to-book ratios and forecasted growth. Large-cap value stocks represented by the Russell 1000 Value Index, which measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Small-cap stocks represented by the Russell 2000 Index, an index comprised of the 2000 smallest stocks in the Russell 3000 Index. Small-cap growth stocks are represented by the Russell 2000 Growth Index an index comprised of the 2000 smallest stocks in the Russell 3000 Index with a below average value orientation. Small-cap value stocks represented by the Russell 2000 Value Index, an index comprised of the 2000 smallest stocks in the Russell 3000 Index with a below average growth orientation. Foreign stocks are represented by the MSCI EAFE Index, a market value-weighted, arithmetic average of the performance of more than 900 securities listed in several developed markets, excluding the United States. Bonds represented by the Barclays Capital U.S. Aggregate Index which includes U.S. government, corporate and mortgage-backed securities with maturities up to 30 years.
- Annual investments are made into the best-performing asset class index of the previous calendar year.
- Annual investments are made into the worst-performing asset class index of the previous calendar year.
- Annual investments are distributed evenly among all eight asset class indexes each calendar year.
Indexes are unmanaged and do not take transaction costs or fees into consideration. It is not possible to invest directly in an index. Performance figures assume reinvestment of dividends and capital gains. This chart is for illustrative purposes only and does not represent the performance of any John Hancock fund. Diversification does not guarantee against a loss. Past performance is no guarantee of future results. Share price and yield will vary and you may have a gain or a loss when you sell your shares.