Philosophy / 

Structure, or asset mix, determines most of the performance in a diversified portfolio. Investors choose asset classes to play different roles in a portfolio, and their appetite for risk guides their asset allocation.

Capital markets are composed of many classes of securities, including stocks and bonds, both domestic and international. A group of securities with shared economic traits is commonly referred to as an asset class. There are several asset classes, all with average price movements that are distinct from one another. Investors can benefit by combining the different asset classes in a structured portfolio.

A full range of domestic, international, and emerging market asset classes includes small, large, value, and growth stocks; government, corporate, and municipal bonds; real estate; and commodities. Because the asset classes play different roles in a portfolio, the whole is often greater than the sum of its parts. Investors have the ability to achieve greater expected returns with less price fluctuation and more consistency than they would in a less comprehensive approach.

However, because no two investors are alike, there is no single "optimal" asset allocation. Each investor has his or her own risk tolerances, goals, and life circumstances that dictate the holdings in their portfolios. You should consult your financial advisor or plan administrator to help you determine an appropriate mix. In general, the greater the proportion of stocks a portfolio holds, especially small cap and value stocks, the more "aggressive" is its risk and the greater is its expected return.

A Structured Approach to Asset Allocation
Hypothetical Portfolio Annualized Returns
Hypothetical Portfolio Annualized Returns
Monthly: 1993-2012, rebalanced monthly.
Dow Jones Wilshire data provided by Dow Jones Indexes. Lehman Brothers data provided by Lehman Brothers, Inc. Russell data copyright © Russell Investment Group 1995-2012, all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. MSCI index is price-only for 1993–1998, and net-dividend for 1999–present.

Hypothetical examples are provided by Dimensional Fund Advisors for illustrative purposes only. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. The information shown should not be relied upon to make investment decisions. Indexes are unmanaged and considered to be representative of the historical performance of a particular asset class. An investment cannot be made in an index. Past performance is not an assurance of future results.

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The unusually strong performance of large cap stocks in the late 1990s is put into perspective. Patterns in the historical returns represent the normal drift of a random walk.