Wrong answer buddy:

#1: The random probability that is beyond the human control. No one can predict what the market will be and whether the past performance equal future return. We are assuming that bonds and cash have lower risk and lower return than stock, but that is not always the case and it is not guarantee to be like this in the future. US dollar devalued and mortgage loan crisis, downgrade, etc.

#2: Wrong again, you cannot quantify risk that are not yet known to the market. Accidents, lawsuit, product recalls, poor management, market changes are not always static forever (imagine 50 years ago people predict the downfall of GM, Citigroup, GM, to the downfall of AOL, Yahoo, etc. How do you quantify the standard derivatives of an uncertain and ever changing market correctly?

#3: The only way to beat the market long term is to stay out of the market. The way we have all the 401k, IRA, and pension tied to mutual funds guarantee that it is tied to the US economy and retirement cycle. When all the baby boomer retire, no one will buy their "cash out" and the market will collapse. Even Warren Buffet said that if you expect the current 10% annual return, you should sell Berkshire and buy something else.



The analysts are always off from their rating and target price for a reason. While they are almost always accurate from past data, they are horrible at predicting things that are yet to happen. Even Warren Buffet told us to beware of the false precision of these data and stay focus on the fundamentals.

The only way to match the market returns are:

1) Pay off your debt. Assume a 6% interest rate, you have the ability to earn 6% return tax free (that equals 9% for many of us) risk free and no fee (compare to 0.5-1.5% commission a fund will charge) by simply paying off interest before anything else. 9.5-10.5% risk free return, where else can you find it? Even more if you have high interest loan.

2) Learn to value stocks on your own instead of relying on a broker, agent, or manager. Cut them out as they are not better than any of us because no one can beat the market in the long term. Learn the fundamentals and invest with your own skill and knowledge. Instead of letting the fund manager suck you dry while taking kickback from the companies that want to unload their stocks.

3) Invest in your own education: learn to making better income via a new skill or highly valued skill. If you can save up enough and go to college for a good degree (biotech, engineering, law, medical, etc). The rewards beat market many fold and cannot be taken away from you, ever. After all, someone has to make the money so that the share holder can make a fraction of it after paying their salaries. Right?

1. The importance of asset allocation is not open to serious debate. For one of many definitive studies on the subject, please see:

http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/AssetAllocationExplain.pdf.

2. Standard deviation measures historical risk. It is not predictive of future volatility. However, historical risk is critically important to investors who are concerned about risk in their portfolios (which should be every investor). For an excellent article explaining the importance of standard deviation, please see:

http://www.efficientfrontier.com/BOOK/chapter1.htm

3. There is a very simple way to achieve market returns: buy the global markets using low cost index funds. Warren Buffett is, in fact, a strong proponent of this strategy.

I am not aware of any other strategy that will permit investors to keep pace with inflation and taxes.

Pandabear, while you are right that we cannot predict where the market will be succeeding, we can diversify away a portion of risk by allocating it in separate areas.
Also, as dan said, stdev is calculated by historical data, and is used in modern portfolio theory extensively.
While your advice is sound, its not very relevant, or useful to an investor.

Good Lord!!! This blog and the comments to it are among the most pathetic I have ever read. People made money on investments long before "asset allocation" was a Nobel-winning buzz phrase among the broke-rs and anal-ysts. Standard deviation is the square root of the variance around a mean value and is not really applicable as a financial term since it would imply a constant value to an investment. The well-understood term "volatility"--whether share price or volume--is the term that differentiates a conservative from an aggressive portfolio. Stop confusing investors with your pretty buzzwords, Solin. All the technical crap about 200-day moving average and the like never made anyone a dime over a 5 or 10-year period.

While it is true that most mutual funds (and investors for that matter) fail to make market-level returns over any 5 or 10-year period, it is interesting that one sector has ALWAYS outperformed: Utilities. Isn't it funny that the sector with the least turnover, least risk and highest dividends is ostracized by the self-proclaimed financial experts? Maybe it's because they can't make commissions off of stocks which aren't traded frequently.

Good Lord!!! This blog and the comments to it are among the most pathetic I have ever read. People made money on investments long before "asset allocation" was a Nobel-winning buzz phrase among the broke-rs and anal-ysts. Standard deviation is the square root of the variance around a mean value and is not really applicable as a financial term since it would imply a constant value to an investment. The well-understood term "volatility"--whether share price or volume--is the term that differentiates a conservative from an aggressive portfolio. Stop confusing investors with your pretty buzzwords, Solin. All the technical crap about 200-day moving average and the like never made anyone a dime over a 5 or 10-year period.

While it is true that most mutual funds (and investors for that matter) fail to make market-level returns over any 5 or 10-year period, it is interesting that one sector has ALWAYS outperformed: Utilities. Isn't it funny that the sector with the least turnover, least risk and highest dividends is ostracized by the self-proclaimed financial experts? Maybe it's because they can't make commissions off of stocks which aren't traded frequently.

Off topic, but related, I have been investing via brokers, financial planners and by myself for 20 years, in the USA and offshore. Not one fund or expert has made me any significant money over this time. In fact, most are about flat over the past 10 years. And now that the SEC forces funds to divulge how few (or none) of the managers invest in their own funds, I am concluding that it is nearly impossible to make long-term money via stocks, mutual funds, etc. Can anyone prove me wrong?

So Johnnyboy tell us:
Does your entire portfolio consist of one utility stock that you trade in and out of as the 'volatilty' changes? IE, when trading volume increases?

So tell us your genius strategies:

The fact that you refer to a sector rather than a single stock also tells me that you shouldn't be poo-pooing asset allocation quite as much.
It didn't take a Nobel Prize winner to tell us that asset allocation is a good thing.

togoeast: EMH being held true, no one will ever continuously beat the market. That is only the case, however, if emh is true. I believe its true to a point.

rv, hmmm. Based on your comments and my experience, then where/how are people making any money in investments over the long haul? It seems I am better off plunking my money into one of these high interest Internet savings accounts and not worrying. The long term effect is about the same, but without the risk, and without lining the pockets of money managers.

I did make a mistake in my last post. Emh basically means that everyone, the average joe, and a analyst who works day and night, basically have the same chance to get a return, which isnt always true. In some cases it is possible to consistently beat the market. You ahve to rememebr risk, tough. I remember once reading about a mutual fund with a 50% rate of return one year, and the very next year having a -20% rate of return.

I really don't have the expertise to tell you where to place oyur money. Maybe I am totally wrong, and mutual funds aren't completely volatile, and you should put your money into the market. Remember, though, everything has risk.