Asset Allocation

The authors start by noting that record amounts of funds have flowed into bonds in the last two years as stock prices plunged and interest rates continued to decline. However, investors need to carefully consider not only the likely future performance of bonds but also the asset allocation decision. Many investors do not realize how the long-term record of bond performance is skewed by a relatively short period, and how bond risk has changed over time. In addition to putting the bond yield-price relationship into long-term perspective, the authors examine how the relevant variables concerning stocks and bonds have changed over the years. They consider in particular the strategic asset allocation decision, based on the most recent 40 years of data. Their analysis indicates that on the basis of modern financial history, a step back from a portfolio heavily invested in bonds is currently warranted from a strategic asset allocation perspective.