Many investors tend to focus on selecting the right stock to buy and choosing the perfect time to buy and sell. But some experts say these factors are a sure-fire way to damage portfolio performance.
According to Roger Ibbotson, chairman and founder of Ibbotson Associates and a professor in the practice of finance at the Yale School of Management, what really drives performance over the long term is asset allocation – the assignment of money to different categories of assets, such as large- and small-cap funds, international funds, bonds and cash.
“Over the long run, what drives performance is not whether you’ve picked the hot mutual fund, but which asset classes you hold in your portfolio and in what proportion,” said Ibbotson.
To develop a long-term investment strategy, investors should evaluate their goals, time horizon and risk tolerance to determine an appropriate asset allocation and then select mutual funds to fill it.
An individual’s investment goals, such as funding retirement, college or a vacation home, tend to guide the time horizon of the investment. If the investment horizon is fairly short, it is...
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